CIHM 
Microfiche 
Series 
(Monographs) 


ICMH 

Collection  de 
microfiches 
(monographies) 


Canadliin  In-^tituto  for  Historical  Microreproductions  /  Instltut  catitTdie      ^e  nucromproductionj  historiquos 


1QQQ 


I 


Technica'  and  Bibliographic  Notes  /  Notes  techniques  et  bibliographiques 


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n 


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n 


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whichever  applies. 


Un  des  symboles  suivants  apparaitra  sur  la 
derniAre  image  de  cheque  microfiche,  selon  le 
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required.  The  following  diagrams  illustrate  the 
method. 


Les  cartes,  planches,  tableaux,  etc  ,  peuvent  etre 
film*s  i  des  taux  de  reduction  diff^rents. 
Lorsque  le  document  est  trop  grand  pour  etre 
reproduit  en  un  seul  clich6,  il  est  film6  ^  pariir 
de  Tangle  sup^rieur  gauche,  de  gauche  i  droite. 
et  de  haul  en  bas.  en  prenant  le  nomb^e 
d'images  n^cessaire.  Les  diagrammes  suivants 
illustrent  la  mithode. 


1 

2 

3 

MICROCOPY    RESOLUTION    TEST    CHART 

ANSI  and  ISO  TEST  CHART  No    2 


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II  2.5 
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Modern  Business 

CANADIAN   EDITION 

A    SERIES    OF    EIGHTEEN    TEXTS,    ESPECIALLY    PREPARED 

FOR   THE    ALEXANDER    HAMILTON    INSTITUTE    COURSE    IN 

ACCOUNTS,   FINANCE   AND  MANAGEMENT 

KDITHD    15  Y 

JOSEPH    FRENCH   JOHNSON 

PFAN.  sr.w  voHK  r,Mvi:,iMrY  s,  ii  u.,,  ,,r  ,  ,,„mkfue,  accoi'sts  and  finaste 


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SllYMorii    \\  ALTON 
.        .        DkNTI  Ii    S      KlMHALL 

\\'\LTi:n  S,  ,'on\.^o\ 


I    f 


s  «4^ 


Money  and 
Banking 


A  DISCUSSION  OF  THE  PRINCIPLES  OF 
MONEY  AND  CREDIT.  WITH  DESCRIPTIONS  OF 
THE  WORLD'S  LEADING  BANKING  SYSTEMS 

BY 

EARL  DEAN  HOWARD 

PROFESSOR  OF  FINANCE  IN  NORTHWESTERN  UNIVERSITY 
SCHOOL  OF  COMMERCE;  AUTHOR  OF  "INDUSTRIAL  PROG- 
RESS OF  GERMANY" 

IN  COLLABORATION  WITH 

JOSEPH  FRENCH  JOHNSON 

DEAN  OF  NEW  YORK  UNIVERSITY  SCHOOL  OF  COMMERCE 
ACCOUNTS  AND  FINANCE:  AUTHOR  OF  "MONEY  AND 
CURRENCY."   "THE   CANADIAN   BANKING    SYSTEM."    ETC. 

REVISED  BY 

W.  W.  SWANSON 

ASSOCIATE  PROFESSOR  OF  POLITICAL  SCIENCE  IN  QUEENS 
UNIVERSIT^- 


Modern   Business 

Canadian   Edition 

Volume  VII 


ALEXANDER  HAMILTON  INSTITLTE 
NEW  YORK 


C'OPTRICHT,     191  I.    BY 

ALKXAXDKU    HAMILTON    IXSTITITE 

('0PVliIi:HT,     lOl:;,     BY 

ALKXAXUKK    HAMILTON-    INSTITfTE 

CopyiiiiaiT,    lUi:i,  BV 
ALKXANDKU    HAMILTON    INSTITUTE 

CripVliMIlT,      1911,     BV 

ALEXANDKI;    HAMILTON    IN.STITL'TE 

COPYKIGIIT     IN    GkE^T    HriTaIN,     1  •)  14      BT 

ALKXANUEH   HAMILTON    INSTITUTE 


EDITOR'S    PREFACE 


This  volume  (liscusses  questions  in  which  the  iVmerican 
peo])le  have  heen  I'oreed  hy  events  to  take  a  deep  and 
personal  interest.  The  rise  cf  prices  and  resultant  in- 
crease in  the  cost  of  living  since  181)7  have  ])rovoked  uni- 
versal discussion  and  even  called  forth  proclamations  of 
disapproval  from  mayors,  governors  and  other  j)ublic 
men.  Canada  lias  succeeded  in  avoiding  many  of  the 
monetary  evils  common  to  other  countries.  The  panic  of 
1907,  while  it  affected  Canada,  was  due  to  causes  prevail- 
ing in  the  Ignited  States.  Similarly  the  tight  money 
situation  in  191.3  was  caused  hy  conditions  south  of  the 
border.  The  discussion  of  both  Canadian  and  United 
States  money  ])roblems  will,  therefore,  be  of  special  in- 
terest to  business  men  in  Canada. 

It  goes  without  saying  that  no  man  is  fit  to  plan  the 
digghig  of  a  tunnel  or  the  construction  of  a  railroad,  to 
mend  a  clock  or  repair  an  automobile,  unless  he  has  had 
a  certain  amount  of  scientific  trainiiig.  In  mechanics 
the  world  recognizes  the  need  and  ])ractical  value  of 
science.  l!i  finance  the  same  need  exists,  but  it  is  not 
yet  generally  acknowledged.  E\erybody  thinks  he  un- 
derstands the  money  (juestion,  or  that  it  is  not  worth 
understanding,  and  the  average  man  is  inclined  to  think 
that  the  business  of  banking  is  so  simple  that  if  our 
banks  have  in  any  way  fallen  short  of  their  duty,  the  men 
M'ho  manage  them  must  either  be  very  ignorant  of  their 
business  or  very  selfish  and  sjieculative  in  their  methods. 

As  a  matter  of  fact,  the  science  of  monev  and  credit. 


KDITolfS   I'KKFACK 

wl.ilc  almost  as  exact  in  its  nature  as  niathematiis    is 
one  ,>|  the  most  difJicult  in  the  AvhoJe  fieUl  of  economies, 
and   the   h.isiness  or  profession  of  hanking-,    wliich   is 
founded  ujx.n  llmt  science  and  should  be  conducted  in 
aceonhmce  with  its   principles,  is  one  demanding  the 
keenest  and  clearest  hrain.      Industry  furnishes  the  red 
blood  of  the  economic  organism.     Trade  and  commerce 
are  its  cn-culatory  system.      Finance  is  its  nervo.is  sys- 
tem.    If  the  banker  is  incompetent  and  fails  in  the  p'.r- 
formance  of  his  task,  the  entire  business  world  is  pai-a- 
lyzed. 

In  the  present  volume  the  effort  has  been  made  to 
.yivethe  reader  in  the  clearest  possible  lan<,niage  a  scien- 
tiHc  knowledge  of  money  and  cre(!it  and  an  accurate 
description  and  analysis  of  the  various  banking  systems 
with  which  the  world  is  now  having  experience.     Tlie 
subject  is  difficult  and  no  reader  can  expect  to  get  en- 
lightenment from  this  book  unless  he  is  willin."  to  think 
as  he  reads.     If  he  will  d(.  that,  I  feel  certain  that  he 
wdl  quickly  grasp  all  the  principles  expounded  and  in 
the  end  discover  that  many   business   prol)lems   whieii 
have  perplexed  him  have  been  made  easy  of  solution. 

The  editor  cannot  too  strongly  advise"  that  this  volume 
be  read  carefully  by  the  general  business  man.     The 
hanker,  of  course,  should  understand  the  subject.     If 
lie  does  not,  he  is  conducting  his  business  by  rule  of 
thumb,  and  is  courting  disaster.     But  the  business  man 
should  not  think  that  Money  and  Banking  are  matters 
with  which  he  is  not  concerned.     On  the  contrary,  they 
treat  of  matters  which  immediately  concern  him!     The 
relation  of  money  to  the  upward  and  downward  swings 
of  prices  is  something  which  the  average  Inisiness  man 
does  not  percei^•e,  yet  it  is  something  which  he  ought  to 
understand,  for  his  prosperity  often  depends  on  causes 


EDITOR'S  I'HKFACE 

affecting'  merely  the  (kniaiid  lor  and  supply  of  money. 
The  j)riee.s  of  commodities  are  merely  an  expression  of 
the  value  of  money  and  tliey  change  whenever  money 
ehan^es.  The  business  man  who  Unows  on*  i-e  con- 
ditions which  govern  the  value  of  the  commoiiiiv  which 
he  handles  is  only  half  protected  against  loss.  1 1'  h. 
would  he  safe  he  must  know  also  the  conditions  which 
determine  the  value  of  money. 

Joseph  Frexch  Johnsons 
New  York  University. 


TABLE  OF  CONTENTS 


PART  I:     .AIOXEY. 


SECTION 
1. 
O 

3. 

4. 
'). 
6. 

r* 
I  • 

8. 

9. 

10. 

11. 


rilAI'TFH   I. 
FUXDAMHNIAI.   EC  OVUM  iC"  CONCEPTS. 

PACE 

Reasons  for  tlic  Study  of  Moiuy  ,iii(i   Hmkiiig   ...  l 

Warnings   of  the    l.aU;    Panic 3 

Sciiiicf 3 

linance g 

'I'l clinology   and   HuNimss 4 

BiisiiKss  tlif  Hisult  of  .S|)((iili/,,iii,,ii  ,if  L:il),)r          .      ,  5 

I'rodiu'tion 5 

Production  by  C'ii.ingc  ot   Dwm  rslii]) (j 

'I'ardy    Id  cognition   ot'   \'aluc  of   Exchange    ....  7 

Pri\atc     Property g 

Property   and    WValtli g 

Integration    of    Industry 10 


(HAPriH    (I. 

EXt  11 ANUE. 

1.'^.  Beginning    of    l!\cliaiigc 

1  1.  Barter 

l."i.  .Money 

1(1.  .Money    l{ej)resents    Ini'oniplete    Kxcliangi  s 

17.  Credit 

IS.  (  redits  as   Media  of  I".\cli.inge    . 

I!>.  .Money   and    Credit    Hepresentatives   of    \\(  a 

'JO.  Classification    of    Wi  dtli 

-1.  l'.ntrepren(  ur   .System 

■J-J.  Capital 


'23.      Capitalization 


11 

12 
12 
\3 
I  I 

\r, 
17 
18 
1!) 
•JO 
21 


VII 


Vlll 


MUXKV   AND   BA.NKJNG 


'-H.  D.inaiid    for    Capital    CnniU 

-."'.  .Mumy  IiK'omts  .... 

■-'()'.  .Mithods    ot'     Iin,stii),iit 

-7.  Rtal      Invfstiiiciit      . 


CIIAI'TKH    111. 

N'.vi.ri:. 

'■is.  Valii,'    a    R,.<rist,-r   of    Kr..n,unir    Vorcrs 

'-'!).  .Mtaiiiiiir  ()(■   ••  \-,.,|,|,.  "... 

•it).  Dcrinitioii    (if    till     Diill.ir 

•n.  Kxchann-.abilitv  ti„.  Si.lr   [-tilitv  of  M.ii 

■'*■-'.  (iol'l    not    ai!    Iiloal    Standard 

.'i.'l  Dctrrniiiiation     oC     \aluc 

.'it.  rtility    Tlirory    of    \'aliu' 

<i.'>.  .Maruiiial      I'tijity      .... 

•i<).  .MarMi„,.,I    l-uUiy    („    i|„.    hulixid: 

ti7.  H.conciliatioii    of    tin-    two    Tlirori,  s 


PAGK 


•■it 


28 

29 

'■-'.') 

'-'!» 

.•il 

til 

32 

3:i 

3t 


CHAl'TI.H    l\-. 
KVOI.ITIOV   OF   Till-;    MKDIL-.M    iH-    EXCII A  NCR 

•is.  I'riniili\f    Ideas   of   \'alsi.- 

■i!».  ()rnani.„lai    .^ton,-.    Karly    IMd    as    Mi,,;,',. 

t".  'I'lirrr     I'linctions    of    j'rnintn.'     M,i„ry 

H.  W  aiiipiiiii 

12.  H.avr:-     Skins 

t;i.  A|,n-ii  idtural    i'rodiicts   as    Mon.y 

a.  'I'oliacco    .... 

i'>-  Summary     of     I'rinciplrs 

Id.  Divisiliility 

17.  I   nifiirmity 

l-'^-  (  oj^iii/aliility 

Mi.  .>^t.diilit\     of    \-altir 


.  fir> 

■     .  at) 

.      .  'Mi 

.       .  36 

.      .  .'i7 

.       .  38 

.       .  38 

.  40 

.  41 

n 

42 
42 


'■  11  \  I'  it  I;    \  . 
KVOIt  Tiov  ,„     ,■,,,..  sTWDMd,  OF   VAFl  F 
r>0.      M.lal   Slandard-,   thr    I  iii,.(    i,,  .w,,,,;,,. 
:'>\       (iooij   (^11  diti,  s    ,       .       . 


I  I 


C'ON'l'KN'JS 


IX 


PAGE 

45 

46 
46" 


.  48 

.  49 

.  .^0 

.  51 

.  52 


SFXTION 

.'>2.  Platinum  I'liMicrrssfiil  ,is  Mdiuv 

.'5;).  Oiijictioiis  to  (iold  ,111(1  Sil\(r 

:">  K      Coiii/ifTi' 

.").■).      Nanus  of  ('dins 

.■)().      Hrtiuircnu  nts    df    (khhI    Coinage 4- 

57.      Standard  of  \'alnr 

T'S.  Donl,],.   Stan. lard    I'ossil.lc    l-ntil    Last    (cntiiry 

.'lU.      ( in  sliani  s    Law 

(il>.       .Mi.stak<  s  of  I'.arly  I.rgislalors 

()1.  K\j)(  rirnr,.  of   Knjrj.ipd   uiH,    I),mi!iI(    Stand.inl 

<)''^'.  Adoption   of   Singlr   (,old    Standard    I  innt,  ntional    .       .       53 

6:i.      .Mintage ,, 

Cn.      I.tgal  T.  iid.  r 52 

6r>.  Historv  ot'  (  fiinagc  in  tlic  Cnitrd  States   ....              5() 

(i(i.      First    Ratio   ot'   Sil\<r   to   (iojd    | ,", ;  | 5,j 

()7.       Inaeiairacy   of  tin-    Ratio  ,ind    its    I'llf,  cts 5- 

68.      Disappear.aiic.'  of  tli.'  Sii\er    Dollars 5)^ 

6.0.       Cliailge    of    Ratio    to     !(i:I g^ 

70.  I.(  gal   ■{',  nd,  r  Acts  Created  a   Paper  Standard       .       .        .       6O 

71.  Single  (iold  Standard  alter    l,S7;) (jj 

7:J.      -Vet  of  I  poo '      g„ 

7^.  Suniinarv        .       .                                                                               r,-, 

•       • ()J 


(  HAPi'l'li    \  I. 
STAND  Mil)  Ol'   Di.j  KlfUKl)   l>  \  VM  (-.NTS. 

7L    n.'f'.cts  of  (,,,],] 

75.  I)' linition  of  Drfrrnd   Pavnieiils 

76.  I'fl'eet  of   legal    i'l  nder    I  aus    ...... 

77.  Coristitulion alily   of    I  ecr.ij    'i'mdc  r     \ets 

78.  Delitor  (  l.iss  Injiind  l>\   .111  .\ppreeiatiMg  St.uidird 


()t 
6.-. 
(it) 

(if) 
(18 


CIIAPTIR    \If. 
srrn.v  wr)  di.mwm  i\  lii.i,  \  iiov  to  movky. 


so.      Prires  D.  p.  nd   Cpnii  ||i,    ^tone\    Matk.t 

XL  I't!!!!'        of       \!f.!::    I 

8'.'.       Distinction   IMudu   1),  Mn    .iiid   D.niand 


fif) 

711 
7i 
71 


MONEY   AM)  BANKING 


S.^.  Tiirrr  \';)rj(  ties  rif   Money 

'"^K  I'iat   \.   Cr.'dit    Momv 

>^'>-  Di'iiiaiKl  (or  .Muiicv  Aiialvzcd 

Sf).  Hapiifity    of    (  irciil.itioii 

X7.  Krt'rct    of     I'opiil.ltioii 

■■^N.         V.tl'ivi     of     DiMsioil     of     l.;il,o|- 

S.M.      Sjiccial   Dciiiaiul   for  (,,il,l 

!"l.  I'ayiiiiiit   of  ('ontracts 

<M.  Store   of   \-;,iiie 

!»'-'.  [riMriirity    of    Property    and    Coiitraets 

.'):i.  Spirial    Demand  for  Money  as  a  Store  of  \-al„e   . 

iH.  Hoardinii" 

!)a.  Dei'liiie    of    Hoardinjx 

06".  Jiink  Hes(  r\(s  not  Hoards 

,'>7.  (io\ernni(nt    Iloardino' 

.'»N.  Diseriininatioii    in    Demand    for    Money 

!»<>.  Seasonal   Demand   for  Money 

HID.  Demand   tor  M.m.y  in    International   Trade 

nil.  I'remiinn   on   Crold 

ll'-;.  Lneertainty  of   tlie    Demand    for   Money 

ill.'!.  Snpply    of    Moi:ev 

I'U.  X'arielies    of    Tnitid    States     Mn?iev 

11'.".  Siipply  of  (,,,l,i "      _ 

l"(i.  I'.ietors    in    tl,e   Snpply    of   C.old g.j 

i"7.  I'ecnliarity    of   tiie    Snpply    of   i.old 

!"''<■  Ul^torrell   Illustrations 

I"!'.  ■|''iiip..rary   Hesnits  of  (  jianp    ,.f  Mom  y  Supply   . 

ll'».  ''I"  i  of   Increased   Supply  of  (, old   Traerd  Out    . 

'"•  '   il"'l    '"    111'      I'fice-Haisinf;    Klfeet    of    (,o!d 

I  I'-'.  .\lt,  rnali\e    [Ms    ,,(     .\ ,  w    (iold 

I  I.!.  Widespread    l.lleel    of'    \,  w   (,old 

1  I  I.  (  nn.p.irison  of  Kileet  of  Incr.  is,    of  Supply  ol  (.old  and 

I' a])'  r  Mom  y 

II.-..  ilo«    Mueli   Momy  is  Needed  m  a  loiintry.* 

Ilti.  I'nee   (  hantr>s    not    Sviielironons 

117.  Stiiiml.itin^-    Kdret   of    Hisini:    I'ru-i  s 

I  I  H.  He.ielioii 

I  l<>.       .Svvlnirv     ,,«'      I>>; 


TACt. 

7'-:' 


7:i 
I .'' 

71 
7."i 

7.'' 
7."> 
7t) 
7fi 


.  7S 
.  7S 
•  7.<> 
.  80 
.  80 
.  81 
.  81 
.  82 
8'J 
8,'{ 


8i 
81. 
8j 
86 
87 
87 
88 


I'-'O.      C'linuilativ,     Ktle.t    of    i:(()noinie    Torres 


8.0 

91 
!)1 


V^ 


CONTENTS 


XI 


cHArri.i}  \iii. 

'1  II KOI! V  OF  I'HICES. 


1-21. 
\2-2. 
12;  J. 
12  K 
1-2'). 
126. 
127. 
128. 
1 29. 
l.SO. 
ISl. 
132. 
!  -.i'.h 
LSI. 
135. 


"  Slinrt  "  Sales  of  Moiiry    . 

"  Squcezi!if;   tlic    Shorts  "... 

Forced   Selling 

Peo|;le    Heeoniing    Better    I'xliicatcd 
Ciriier;il    Price    Level     .... 

Price     'r.iMes 

M'lny  (  oniiTioditie.s 

Kxampie    of    I'riee    T.ililc    . 
"  W'eiglitiiig  "    of    Price    Tables     . 
Advaiit.ifies  of   Weiglitiiig    . 
Falkiier    Price     j'ahli'     .... 
High    Prices    During  the   Cnil   War 
I'oreigii    Price    Tallies    .... 
Kcmiomic  I'orces  to  he  Observed   . 
Saving   and    In\csting    .... 


CHAPTER    IX. 
DOMESTIC  AM)  rOKF.IC.N    KXCH ANC.R. 

136.  Relation  15et\M(ti   i'ori  ign  .-iiid  Doniestic  I'xch  ing 

I.S7.  Paniients  1)\-   Means  of  Credit   Balances    . 

138.  rnnction  of  the   liatik  in  Making  Paymciils 

1.3f).  Payments    at    a    Distance 

IK).  Exch.'nge    on    New    ^ Ork 

IH.  How  the    H.inks    Handle    New   York    I'xchangi 

1  PJ.  Setthinenl  of   .\ccoiints    J^etween    H.-nks    . 

1  t-.T.  Cost   of   Ciirreiicy   Shipments    .... 

IH-.  Settlements   'I'hrongh  the   .*^ul)-tre  isnries    . 

1  I,').  Rate  ot'  Ni  \v   ^ Ork   Kxchange    .... 

1  16.  .'^ignificanee  of  Rates  o''  Domestic  ]-,\eh,ingi 

147.  The    (  ieiring    House    Principle 

118.  Settlmu;    llilanees    hv    Cse   of   (  r.dit    . 

1  If),  (iold    the    Internal  Min.'il    Medium 

!,")().  |-'iinction  of  tlx'  Dealer  in  F'onign  I'.xclianui 

\!t\,  }■' \  ■ininlc     of     I''<irii<r.i     ]' vi-jiMiiirc 

1.VJ.  Why   Minker*  ari^  \\'illirtg  to  Pur<'hise   I  nm^ 

iriii.  l»rogress  of   Draft ' 


TAr.r 

!)■' 


!)() 
!)7 
97 
97 
98 

99 
100 
100 

lot 

10() 
107 
109 


Drifl 


12 

12 

i;{ 

13 

1 1 
1:. 

U) 


18 

19 
21 

2^ 

23 
24 


Xll 


MONEY    AM)    BANKING 


177. 
178. 
179. 

180. 


8i65 


Xn  LStockholdrr 


PECTION 

lai.  Quotations  for  Forcifjii  Exchange 

1,)5.  Tlir    Pound    Strrling 

1^)6.  Cost   of    Sliipping   Gold 

157-  The  Minimum  Gohl  Point  for  Sterling  Exchange 

158.  Maximum  Gold   Point   for  Sterling   Exeh,i 

159-  Wliv  Sterling  Exchange  May  Fall  Below 

160.  The  Gold  Market     .      .      .      . 

Ifil.  Bank    of    France       .... 

162.  Gold    Shipments        .... 

16.3.  Our   Foreign   Commerce 

16  i.  Invisible  Items  of  Foreign  Trade 

16.5.  Movements  of  Capital    . 

166.  Interest  and  Dividend  Payments  to 

167.  Freight 

168.  Tourists 

169.  Foreign  Exchange  Market  . 

1 70.  Explanation    of    Articles 

171.  Cables 

17"-3.  Varieties  of  Foreign  Exchange  . 

17.S.  Demand  Sterling      .... 

171'.  English  Banking  Customs   . 

175.  Finance   Bills 

176.  Profit  on  Finance  Bills  . 
Foreign   Department  of  a  Bank 
Traveler's    Letters   of   Credit    . 
Ccinmereial  Letters  of  Credit   . 
Buy'ng  I-'oreign    Exchange   for   In\ 

181.  German  and  French  Exchange  . 

182.  Arbitrage 


CHAPTER  X 
niMF.T.\LLISM 


18;!. 
isr.. 

186. 
187. 
ISS. 


World's  .'Jtock  of  (Jold   . 
History  of  the   Precious   Metal 
Tlic  I'riid.il   Period   . 
Discovery  of   America    . 
t',  tiect  of  Sdvor  from  America 
Piiiti  tallism    Defined 


estmen 


t 


PAOE 

125 

125 

126 

127 

127 

128 

129 

1  .'30 

131 

l.'U 

I, 12 

133 

131. 

131. 

131. 

135 

13fi 

136 

138 

138 

1.3.9 

110 

141 

113 

I  15 

Uf) 

I  17 

119 

152 


\5^ 
153 
151 

155  ^ 
155  ' 
156 


CONTENTS  xiii 

BECTION  p^^.j, 

189.  Difficulties  of  Bimct.-illism 157 

19U.  Adv.uit.igts  of  Biiiutallism 1  j8 

191.  The   SiiifrJe   Staiid;ird :58 

192.  E.irly  Atltiiipts  .'it   Inriation I60 

\i)'-i.  Tile   L.itin   Uiiion KJO 

191.  IJtiiioiittization  of  Silver  by  the  United  States      .       .       .  nil 

1!)5.  Acts  of  187S  and  1S9() l(,o 

196.  British   Indi.a  aiid  the  Coinafre  of  Silver 1()3 

197.  Final   Tailure  of  Bimetallism Itjl 

CHAPTER  XI. 
HISTORY   OF  CANADIAN   MONETARY   SY.STEM. 

198.  Economic  Situ  ition  in  Canada  After  the  Conquest    .       .  I66 

199.  New  England  Traders \(](] 

200.  Financial  Situation  After  the  Conquest 1(J7 

201.  Early   Exi)erinunts  in  .M.dia  of  Exchange     ....  1(J8 

202.  Standard  Currency  of  the  Colony KJc) 

203.  Clianirrs  in  the  Currency  After  1783 170 

201.  Ditfieidty  of  Changing  Practice 171 

205.  Act  of  1808 I70 

20C.  Dual  I'uiutions  of  the  Early  Canadian  Merchant     .       .  173 

207.  Early  Pealings  in  Foreign  Exchange 173 

208.  War  of   1S12  in   Its  Relation  to  Canadian  Finance     .       .171 

209.  Attitude  Toward  Pa)'er  Currency 17.5 

210.  Origin  of  the  (in  at  Chartered  Hanks I76 

211.  Alex.inder   Hamilton's    Principles    .Adopted     ....  I76 

212.  Articles  of  .Assoeiatieiii I77 

213.  First   15aiiks   of   I'ppt  r  Canada 178 

211.  Atlinq)ts  at  Currency  Reform 178 

215.  Result  of  Currency    Reform 1 70 

216.  Exchange  with  the  l'nit( d   Kingdom 180 

217.  Canidian   Curnriey   in   the  Second  Quarter  of  the   Nine- 

teenth  Centurv 181 

218.  Variety  of  Coins  Circulated 182 

219.  Can.idian  Currency  .\fter  tlie  Cnion  of  Cpper  and  Lower 

Can.ida    in    ISH     .                       let 

220.  Issue  of  Short  Time  (hu  eminent   Oehenture  in    1 8  18    .  18  1 

221.  Crisis   of    1857 185 


I; 


XIV 

SECTION 

2-23. 

-2-25. 
-2-21). 

-2-27. 
-22S. 


PAOki                        ! 

169     . 

.       .    186 

. 

.      .    186 

. 

.       .    187 

.      .    189             , 

Notes 

•      ■    190             \ 

. 

.     .  191 

•      • 

.      .    192 

MONEY    AND    IJANKING 

Early  Attinipt  at  Government  Note  Issues 

Mr.    Gait's    Plan 

J'roviiK'ial  Noti-  Issues 

Dominion  Notts  for  Banking'  Reserves 
Later  Legislation  Concerning  Dominion 
R(  suit  of  Sir  Francis  Hincks'  Legislation. 
Uniform  Currency  in  Canada    . 

PAIIT   II:  BANKING. 

CHAPTER  XII. 

NATURE  OF   CREDIT. 

229.  Origin  and  Kinds  of  Credits 193 

2,J().  I'se  of  Credit  in  Industry igi' 

2^1.  Function  of  Conunercial  Banking 195 

-2'.'>2.  Mortgages  and  Bonds 196 

-2:>:i.  Example  of  Timber  Industry 196 

-231.  Advantages  of  Timber  Bonds 198 

23').  Interest    Rates  on    Bonds 198 

236.  Long-tinu;    Borrowing 199 

237.  Credit  Economizes  the  Use  of  Gold 199 

2.'i>S.  Li(iuidation   of   Credit 200 

239.  Conunercial  Paper  Houses  and  the  Credit  Situation   .       .  201 

2K).  Use  of  Credit  as  a  Medium  of  Exchange 202 

2H.  Bank  Credit 202 

ti2.  1)(  posit    Credit 203 

'J  13.  I'.lastieity   of   Dejiosit  Credit 20t 

2  11.  (Jold  Jie  Basis  for  all  Credit 205 

'JLV  Reserve 207 

2  Ki.  Eff- ct  of   Reserve    Requirements 207 

2 17.  Danger  of  Use  of  Credit  in   Panics 208 

218.  Importance  of  Credit 209 

CHAPTER  XIII. 
EFFF:(  T   OF  (UFOIT  ON'   PRICES. 

Q.tO  rn/.r.-iKinrr    Vi./I    .-,(    \fiir..    FitiiMciit    \fnlifv  ,  .  ,  .211 


250.       EfTect  of    N 


on-i  ireu 


lat 


inff 


dit 


2T1 


I 


251.       C: 


•11. • 


if  Credit 21; 


I 


{ ONTKNIS 


x\ 


How  I.rss.ii(<]    |)riii,ni(l  tor  Moiiry  Caiisrs  IJjm'  m   I'rir.  s    'J  1  ;5 
KtfVc't    of    Nilioiial    IJ.iuk    Xolcs -'■' 


tlji       IJalik    Not 


ts   .■111(1   C'liccks 


Dili'triiitiatrd 


■Jl  !• 


l-'.ti'cct    of   (io\  rn 


it  '  rciiit  Moiuv 


ii,")().      CniiiL     111(1     S|)iciil.it 


lOIl 


II 


ow    Spcculatioii 


Mav    15.-   Both  Cause   and    I'.lfcct  ol    a 


Ri 


sf    in 


i'rioi 


!58.      Dt'ffct  of  our  (urritu-y   Sysuin 


^17 


c  HA  I'll,  u  xi\'. 

C.OVKUNMKM'    Cli  I'.DI  f    (THUKXCV. 


2.")0.      Cl.issiticatioii    of   (io\iriniun 


t    (  r. 


(   tii-rrli.-v 


•2()0.      I'iat    M. 


Drflllrd 


i()l.      r'actors    Dtterniiniiifi 


the    N'.iliic   of   Crrdit    Monry 


'iti'J.      Risk   in   Tree   I'sc  of   Credit    Money 
t:6[i.      Rcmil.ition   of   Credit    Money    , 


;l.      DcNii 


to  M.aliit.aiii  X'.ilue  of  Credit   Money 


•Jt;.). 


(ioverniiH  lit 


C  ridit  not    "Ideal    Mo-v 


2(ry.      Diffieiiltie.s  of  Adjusting  Siii>])ly 


l67.      Prejudices    Ag.iinst    Cio'x 
1861 

2()8.      l"inanein< 


rnmeii 


t    Cr((lit    Monev    R 


tlie    Civil 


W; 


t2()!).      Disadv.ant.ige    of   (io\  (  riiinent    Diht 

270.  {ioverillliellt     Delit 

271.  Demand     Debts    a 


W'eaknes.s 


l~2.      Provisions 


for   Rdirini 


Debt 


2 '20 
220 
221 


!2  1. 


22() 
226 


22  S 
229 


(  HAPTKU   XV. 
ECONOMIC   1  INCHON  OF  Till:  HAN 


27.'1.      Produeti    -    Industries    Clissili 


d 


271.      IJee.iiii 


tul.itiou    of    I'und.iiiient.il    Priiieiples 


Cr<  (lit 


27(i.      H 


Dealer  in  Credits 


Ranks   ."^iijiply   a    Medinni  of    I'.x 


eli.antie 


278.  R.ankiiiii  is  ;i  (Juasi-l'ublie  I'unetion 
27!).  Tlie  Hank  .a  Distributor  of  C-iiit.al 
280.      Bankin-i   Prineii'lc 


231 
232 
2.S3 
2.S3 
23:> 
23.^ 
230 
237 


XVI 


.M()M:V    AM)   r.ANKING 


SECTION 

'281.  Ddiililc    I'liiicticiri   ol'   (  nimnt  rci.il    li.iiik.s 

'28-2.  P.ciili.ir  I'rivih  lie  of  ISuikt  rs   . 

28a.  H.iiiks     Do    Not    Crcitr    Capital     . 

'281.  Source   of   Capital   and   Credit   of    Hank 

'■28').  Opirations  of  ;i   Hank 

i28().  Hesponsiliility  of  the  Hanker  for   i'ropi  r   I  )i>>tril)ution  of 


'287 

'2  1-2 
2  i;i 
2H. 


Capital -2l\ 


CHAI'TKH   XVI. 

ni:r()SiT  cckkkncv. 

of  Credit 21S 


287.  Anal_ 

'288.  How    Credit    Promotes    Iridiislry     .... 

■28f).  Hanks    Create    Credits 

"290.  Hank   Credit    {'referable   to   Cash    .... 

2<)1.  Sliiftinii   of   JJank   Credit    \\'ithoiit    I.itjuidatioii 

'2<)2.  Similarity  of  Checks  and  J5ank  Nott  s  . 

2f).S.  Limits   of   Karninj.;   1N)\V(  r  of   the    Hank    . 

291'.  Ditference  Hetween  a  Casii  atul  Cn  dit  Loan   . 

29;").  Cash  a  Precious  Commodity  at  Times  . 

2!K).  Prohlem  of  the  Reser\  e  of  (ireatcst  Importance 

297-  Lack  of  Co()|)(  ration  Causes  Hanks  to  Lose  Ilcserv 

298.  .Methods   of    Incr<asiiisr   Reserves    . 

299-  Secondary   Reserve    

.'5()().  L'nrcliahility  of   Hoiids  as    Reserves 

301.  Government    Deposits    .... 


2t9 
2  H) 
2.-)  1 
2r)l 
2."). '5 
25, -5 
2.^i 
2:)  t 
2.->() 
2.-.  7 
257 
258 
259 
259 


CH.VPTF.R  XVIL 
BANK  ST  A  ri-.M  FAT  --  R  ESOURCES 

Coiiiliined     Stall  iiient 


.'5(12.      Comliined     Stati  iiient 2()() 

,'!().').      Proof'  of  the    D(  posit   Currency   Theory 2()1 

'MM.      Douhle-Kntry    System 21)2 

.'i()5.      .Mteralions  in  \' due  of  Resources 21).'l 

;i()(i.      Concealed     Assets 2(i  t 

.'i07.      Loans    .and    Discounts 2f)  t 

:i(i8.      Overdrafts 2^5 

.i(>9-  I  nited   States   Bonds  to   Secure   Circulation    ....  2()() 

31U.  rnitrd   States    Honds  to   Secure   I'mtfd    Stil,s    Dt  i)osits  2f)6 


CUNTKN'rS 


Wll 


SECTION 

till.  L'liilid  M.iti  >  Hdiuis  (III  H.iml  . 

yi'2.  I'n  iiiiiim^  oil  L  iiittd  Sl.itis  lioiitls  . 

,'11  ;i.  15(iii(l.s,  Sii'iiritit  .s.  ttf 

M  k  Hanking   ilimsc    I'uniiturf  and    I'ixtiiri-s 

;;:,').  OtlkT    lU:i\    Kstatc    lldUiiiigs    . 

;il().  Due  I'roni  National   Hanks   .... 

;il7.  Due    I'roiu    .Vpiirovrd    Hcsirvi'    .\j;;'nts 

;il8.  (lucks    and    Olhrr    Cash     I  Uiiis  ~  -  Kxcli 

C'ltarint;-    Houst- 

:'<][).  Hills  of  OtliLi-  Nalional  Banks  . 

.S'.iO.  Lfgal     '!'(  lidir     Notes 

;i'21.  Ucd;  inptioii    I'lind 

'3'i:i.  Due   From  the    rniliil   States   Treasury 


mg 


tor 


fA8E 
'^liO 
'itjtj 

-Z61 
^2(J7 
^ti7 

iitJS 

■269 
^269 
269 
!i70 


(  IIAI'TKK  XVIII. 
HANK  S1AT1::.MENT  — I.IABII.IT 


323.  C'a])ital  .Stock   Paid   In    . 

321.  Doiihle   I.ialiiiity  of  Stoekliolders    . 

3-'.-).      Surplus     ImuuI 

326.  L'ndivid.d    I'roHts 

327.  National  Hank  Notes  «.  mdiiig  . 

328.  St  ite    Hank    Notes    Oiii      aiding     . 
32!K  lndi\itlual      Deposits       .... 

330.  I'nited    States    I)e))osits    and    Deposits 

Dislnirsing    Ottieers     .... 

331.  Honds     Horrowiil 

.332.  Notes  and   Hills   Ketliseountt d    . 

333.      Hills     I'ayaln.' 

331.      Certitied  Cheek 

335.  C'asiiit  r's  Cheeks  Or.lstaniling   . 


lES. 


of    Li 


ted    S 


271 

272 
273 


itcS 


275 
276 
276 

177 


278 
278 
278 


(  HAPTKR  XIX. 
OltC.  AM/.  XTION   AND    lUSlN  KS.S   OF   THE    HANK. 

336  National  Hanks 

337.  .Slate  Hanks   . 

,33H.  Private    Hanks 

339.  I'lidi  rw  riting 


.    280 

.  280 
.  280 
.    281 


XVUl 


MONEY    -vM)   UANKINC. 


SECTION 

340.  'I'rust    C  ouip.iiiit  s 

311.  li.iiikiii'i-    Dcpartiiiriit      .... 

.'i  t'2.  Deposits  (if  Trust   (iiinpaiiifs    . 

.'U;i.  'rnist    1)(  pirliiit  lit 

'Ml.  I"iii\iiliial    Trusts 

y  !-,">.  Corpdrati'     Trusts 

;i  Ki.  Sa\  iiij^s    IJaiiks 

;i  t7-  I'Ik'  Orjiaiiizatioii  (»!'  a    IJaiik    . 

.'i  18.  Kvolutioii  of  tlie  Bank   .... 

3\[).  .Stocklioldrrs 

3:'>0.  Directors 

351.  C'oiisidtr.atioiis   (io\  friiinjr  C'hoii'f   of 

3.VJ.  Brl;;<rs  y.  Spiuldiiiij       .... 

35.'^.  Ignorance    No    I'.xrusc    .... 

,'i,")  t.  Supplt  innitary   I'.xaiiiiiiatioiis    Ncctssa 

;{,"),").  Opinion  of  Coil  ;itroIl<  r   Uicitftly    . 

3,')().  The    I'rtsidfiit 

3.")7.  'I'Ik'  Cashier 

3,")8.  Payiiio-    Teller 

3,-)!).  Kecei\ing     Teller 

3()0.  Note  Teller 

3()1.  Diseouiil  Clerk 

S(r2.  15ookkee])iii<i;    Department    . 

3()3.  Laws    Helatiiiji  to   (  ollietions    . 

3b"l-.  I.iahility   of   Colhet iii};-    15ank    . 

ti6').  Colli  etioli    of    Out  of  Town    Clucks 

366.  KMn-lish   Method  ')f  Country   Colltcti.- 


)ire 


PAGE 


etor 


•J  8  3 
'J  8  3 


-J8  1- 
'J8f 
-28") 
-2H6 
'JH() 
28(j 
'.i87 
'288 
290 
'2!)1 

2  in 

i2!)-2 
•293 
-2[r.i 
'2JH 
'2!)") 
•2!»;-> 
29() 
29(J 
297 
-299 
300 
301 


CII.M'TKK    XX. 

nr.po.siis  AND  DKi'osirous 


S()7.  General    Deposits 

3f)8.  Sjieeial      Dejjosits 

36'9.  Safety  Deposit   \    lults 

370.  IiidiieeiiK  iits  to  Depositors   .... 

371.  Dittieulties   in    Kstaiilisliiiiii-  a    New    Hank 
."i  (' c.  >  .iiu<     oi    .1    ij.tiiiviii:^   V  .iriiiei'ii.Mi 

37.'".  Kiteiiit;    Cheeks    and    Drafts     . 

37t-  .Method  of  "  Kiteiii;:;  " 


SOS 

303 
301- 
3()t 
3()() 
3  Ob 
307 
307 


CONTENTS 


MX 


J  I  s, 

379. 
380. 
381. 

383. 
38t. 
385. 
38(i. 
387. 
388. 
389. 

3yo. 


Ucasoiiabk 


Title    to    Dt-pusittd    Clit'cks,   etc 

Case   of    lJi>[)iited   Owiursliip   to    Deposited   Check    . 
Accepting  Deposits  when  Insolvent  is  Criminal    . 
Drawer  Released  from  Responsibility   After 

Time 

I.oeal      Hanks 

Holder  of  a  Check  Cannot  Sue  Bank  . 

Revocation 

Insuthcient    Funds 

Forgeries 

l',)st-Dating 


391. 

39'-'. 

393. 

391. 

393. 

39tJ. 

3!)7. 

398. 

399. 

400. 

401. 

40^2. 

40.S. 

404. 

40r). 

-l!!!". 

407. 
408. 


Set-Ot»" 

Wlun  a  Deiuteitor  Fails,  His  Note  Not  Being  Secured 
Advantage    to     Depositor     .        .        .        • 
Sel-Olf   Makes   Failures   Appear   Worse 

Illustration 

Form  of   Note 

(  HAFTER   XXI. 
LOANS  Ol'  THK  BANK. 

Two  Qualities  :>ecessary  to  the  Making  of  ii  Banker  .       . 

In.estmeiit    Loans 

Conditions  Cnder  Which  They  Are  Good  Banking  Loans 

Industri.il     Loans 

Capital    Loans 

Capital  Should  Come  From  Stock  and  Bond 

Mortgage     Loans 

Loans    Reported   to   the   Comptroller 
Demand    Lo.ins    Have    Increased    . 
Double-Name     Paper      .... 
Single-Name  and  Brokers'  Paper   . 

Judgment  Note 

Collateral   Note 

Risk    in   Collateral    Loans    . 
L'sury  Laws 

('.•ill     I.O.'VilS     F.X'UOlt'  d      .... 

Loans  on  Open  Book  .Vci'ounts   . 
i'roN  iding  Tt  niporary  Capital 


308 
308 
309 

309 
310 
310 
310 
311 
311 
311 
312 
312 
312 
313 
,  813 
.  313 


ssues 


315 

315 

316 

316 

318 

318 

319 

320 

321 

321 

321 

323 

323 

324 

325 

826 

327 

327 


XX 


MO\i:V   AM)   HANKING 


SECTIu 
till). 

I  111. 
111. 

II  -J. 
11,'{. 

n  I. 
iir,. 

U(). 

H7. 

118. 

1  •>'  1 . 


(  il.Vl'  1  i.u   XXIf. 

LOASS  .\C.\lSSi  COl.I.  \  ri.K  \I,. 
I 

('oll.it.  r,;l  ('(,r  H-tiik  I.o.nis 

.Mtrc!i;iii!Jis,    .-IS  Coll-itir.-.l 

A(l\;int,ii;(  ^   (if   (ioixl    W;irrlu>u-,inir    l.,,\vs 

l.o-iiis  nil    M,  r.-|],in(liM-   a    I.ciiitiinat,     riuuln.ii   (,t'    Hank 

.'■^tatciiK  lit    (if    a    Hank    i'n  si(i(  nt 

i.;i\v    ul'    Wari'liousc    Hi ci  ipts 

I'liiroriii     I. aw 

Iii>k    !n\ol\((i   ill    l.o.'iii-,  nil   WarrlHuiNf   Ut-cti])t^) 

(ndrr    til,-     I'r,  s,  nt     Law 

I^MK-    lit     1{(  ,',  ;pts    SaiVgiianlcd 

Proltctioii    ti)     H.)1(1(TS    of     !{rc.i|)ts 
(iarnislimciil    iidt    Allciu,  d 

I'.nalfy    for    l!l.n-,-iI    I'm-  of    Hr(Ti|i!s 

Transirr  of   Tijlc  to    [.nuliT    .... 


PAGH 

329 

330 

;;;)() 

33 1 

332 

332 

333 

333 

33  i 

331. 

335 

335 

336 


'HAITI. H  Will. 
CHKD.'T   1)1  1' AH  r.xilAl    ol      \    UWK. 

lAolutiiiii  of  till'  (  rrdit    i  Jcp.irtliiriit 
Sources  of  Crulit  information  . 
(in  (lit  .Vgfiifit'.s 

Dtitii  s  of  Ol  (iit   Mm 

1  lif  t  oiijiiuii  lal   .Noll -Hroki  1-    . 
C'lian^f  in  the  Hii>sintss  .... 
Dtinaiul    111(1    Supply  ol'  (.  oiinncrtial 
Arc.i.s  of  Hifili  and  Low  li.itts  . 
IJisi'ounl  OliVr  by   Dtahr    . 

Crtdits 

Size    of    Nottb 

cii.M'r.  u  x.\i\ . 
Hisroiiv  Ol    iswmm;  i\  iiii.;  rxiTF.n  states. 

••.'51.  (  li.iraitt  listii's  of  Karly  Haiikinjr 

••35.  Rcl.itior's    witli    Govtrnnitnt 

i36.  Historical    IN  rjuds 

437.  Some  Ivirlv  Banks    . 


1,';!. 

I'J  r. 

IJ."-. 

i2C,. 

■128. 
^29. 
rjo. 

13 1 . 
4.'3ii. 
•1.33. 


337 

337 

339 

340 

341 

311 

312 

343 

343 

.•J4  • 

Sir, 


347 
347 

3iS 
348 


CONTENTS 


-\.\i 


kSS.  I.mni.ip;    nn    B.ink    Stock     . 

4,'jy.  First   U.'iiik  of  the   I'mUd   Stntrs 

■1- K).  Success  of  the  !■  irst  H.iiii\    . 

111.  ()|)))ositioii    to    Uicliartrr 

ItJ.  Second    Hank    of   tile    United    Slat 

}-l.'l.  li((li  niplion    of    Notes   in   Specie 

ill.  Misniana^eiiicnt   of  the    Hank    . 

It.").  .Jackson  Opposed  to  tlii-  Hank   . 

IK).  State    H.mkinp; 

11-7.  Siirtolk    Bank    System    .       . 

•IIS.  \<\v  York  .*^ysleins   .... 

ll-.O.  Safety     I'und    System     ... 

450.  Hond    Deposit   System    ... 

451.  M  istakes  of  tlie  System  ... 
4.")2.  I'"ree  HankiTijj;  .Systriu  ... 
4.5.S.  Kxperienee  in  Otiier  . States  . 

454.  Indiana    and    ()liio    .... 

(ilAl'IIR    \\ 
XATIOXAI.    HANKlMi 

455.  The  Xational  Hank  A<l  .  .  . 
4,")f).  Alaikrt    for    rn.trd   Stat.s    Honds 

457.  Early   History  ot   tlic  Act   . 

458.  ('om|)tr(dler  ol    the   ('nrrenc\'    . 
45i).  Sumiiiary   ol    Nation  d    Hank   A't 
4(j().  Circniatini;    Notis    .... 
Itil.  Jleserve    Id  ciuin ments  of   Nationa 


W 
.S^STK.M. 


H  ink   Act 


PA'.E 

34!) 

.•550 
;551 
352 

•M,:i 
:',r,  1- 

.'i5() 
.■^57 
359 

359 
359 

3fiO 
.i()l 
3().S 
363 


365 
3f)() 
366 
367 
;!o7 
3(19 
370 


(ilAI'llH     X.Wl. 

I'RKSKXT  (  (»X|)|  IKiNS  (M    l!.\XKIX(;  IX    Till:  rMTF.I)  STATKS. 

Ki'2.  Tlu'   l)(M  !n|)!iieiit  of   H.ink   Deposit   ('nrniie\  .'>7I 

Hi3.  I.iinitalioii  of    Di  posit   Ctirrciicy  .■i7'..' 

[•■K      Srasunal     Demands ...  .37.3 

4t!5.      Drplelioti    of     Rc*crvcii .37  !■ 

4tit>.  Aldricli-Vrcdand    .\ct 175 

407.      hi"  lasticitv ^7 '< 

4»!8.      Expansion  of   Hank  Circulation S78 


XXII 


.MOM.Y   .\M)  BANKINC 


SECTMN 

l-fi!*.  Lack  of  L'nity  in  Our  Svstmi 

•J-Tll.  Sa\iiii,r.s    Hanks    .... 

•1-71.  I'ostal    Savings    H;uiks    . 

•i7ii.  Gliar.'iittc   of    IJaiik    Deposits 


PAGF 

.'^77 
377 
378 
:^78 


(  IIAI'II.H  X.WII. 
RELATION-  OF  HANKS  TO  WALL  STULET. 

i7.'i.  \Iark<t   for  S.  ciiritiis   in   tlic   Liiitrd   States    . 

47L  V\  orkiny:  (  a|>ital  of  Dralirs  in  S'c'uritifs  . 

i7.-|.  Di  tails  of  Ihr  Coll.it.ral  Loin 

47(».  (  rrliticatioii 

477.  Ii(  striclions  on   Collateral    ... 

47S.  C-ill   Loan  ILite 

l-7i).  Hespoiisiljijities    of    tile     Loin    (   lerk 

180,  Un(Jig)ste(l    Seeiirili.s 

tSl.  (lose    Helaliun    Hetween    Hi  serves   ami    I'riees 

iS-i.  I'iaii    f,.r    IteniedyiniT    the    Dangir    ;ii    Hidejiosit  iiig    l{i 

scrvts  

48;?.  (dnmiercial    Hanks 

48i.  L'inaiifial     B.iiiks 


381 
382 
383 
383 
38i 
381. 
38.> 
385 
386 


387 
387 
388 


1 


(  li  Al'Il'li    XWfFL 
nVNKS    \NI)    llli;   t   NlfKI)  SI   Nil's    TULXSIHY. 

!Sa.  fiesponsiliilily  ol    t  lie  S(  creta  r_\    of  I  lie   'rreasiirv 

f-'li.  'I'reasiiry  (  aiisi  s  St  riiii^iaicirs 

187.  I>eteeliM     (    iiiTi  ne\     Laws     .... 

INS.  I  .\p(  (ill  Ills    of    tlie    .^lerefirv 


3!)l 
393 
303 


(  lL\i'll,|{    XXIX. 
I.I   KOIM,  \N    UANKIVO  SY.STKMS. 


IN').  Hink    of    Lnpl/in.l 

I!»''.  !)e\elopmi  lit    of    l|„      I    s,      of    CliK-ks 

1!)!.  B.-uik  All  ot    isi  1 

l!l'2.  (h.-ir/icter  of  Hank  ol    i.nul.in.l   Vote   .       . 

ViA.  Tlii     H.iiik    .if    i'.Mnrtn.}    I>ri\,iie 

IfU  I'AMking  in  France 


3<).-. 
3!)fi 
3!)8 
3f)n 
400 
40  J 


CONTENTS 


xxm 


BECTION 

■Hj't.     Bank  of  France 

49(i.  Deposit  Currency  Little  Used  . 

■l[}~.     Asset  Currency 

H)8.      Braiielics 

4!)f>.  Imperial  Bank  of  Germany 

:aH).  Intluenee  of  (ioverniiient 

501.  Mod.  led  on  Bank  of  England    . 

5U:J.      Reserves 


rAOB 

402 
403 
4U3 
401 
406 
406 
407 
407 


•OOS. 

r,oi. 

505. 

r>oC). 

.lOT. 
.'508. 

:)()!!. 
r,\u. 
r.  11 . 
:.i'2. 
r.i.i. 
:^ii  i. 

516. 
517. 

r.is. 

51!). 
520. 


CHAPTER  XXX. 
CANAUI.W    BANKING   SYSTEM. 

Origin  of  Banking  in  Canad.i   . 

The  Substruction  of  tlie  Canadian  Baiikin 

Revision  of  tiie  (ieneral  Banking  Mcasur 

Incorporation  of  Banks 

Tlu-  Branch  Bank  System   .... 
Conditions  of    Note   Issue    .... 
Canadian  Bank  Notes  Based  on  Counnerci 
Tiu'  Ct  nlral  (iold  Riserves  .... 

Security   of   Note    Issues       .... 

Reserves  I'ixed  liy  Eacii  Bank  . 

Reserves   Conipostd  of    I'our    Elements 

Call    l.oa.is 

Investiii''nt    Securities 

Loans  to   Manufacturi  rs.  Wli.ilesalers  aiu 

Internal    Bank    Inspection    . 

Bank    I'.iilures  in  Canad.i     . 

Shareiiohiers'    .\udil        .... 

Canadian    Bankers'   Association      . 


.         • 

. 

.    409 

ig  System  . 

.    410 

c  of  1871    . 

.    416 

.    416 

■            •             • 

.    417 

•            •            » 

.    41!> 

Mai  Assc 

ts 

.    419 
.    420 

.    42. ■< 

^             , 

.    424 

• 

.    426 
.       .    427 

^             , 

.       .    428 

d  l"arin( 

rs 

.       .    428 

.     .  4"; 
.     .  4;i:! 
.      .   4:t6 
.       .    4  .'58 

521. 
522. 
523. 
524. 
5  2. I. 


CIIA^TIK   XXXI. 
CANADIAN    nVNKlNf;    I'KOIU.KMS. 

Brnnch  Banks  and  tti«-  local  (  oiniiiunity    . 
Concentr.ition  i>f   Hcs.tvi  s  in  Br, inch  Banks 
Numher  of   Banks  to   Population    . 

!'>.-■;•.:■.•-;■!     C'.!rr".'!!£  V     >!•     C.'ltl.'ld.!      .... 
*  *'  i '  "~ - 

Criticism  "f    Bank      Not.     Issu.s    . 


439 
441 
442 
443 
VV6 


MOXEY    AND    liASKlSG 

SECTIO!* 

5'.>(i.  Profits  on  T?a,.k-\ot,-  Issurs 

5'J7.  ExcTssiv  Surplus  ,„•  Rr.t  Tunds   .  Jm 

■V-'8.  Profits   of  tl..-   (■.•u,,-uiia„    Banks       ...'■"■■  [r^ 

^-^9.  Hank    .M.rp  rs  an.l   Anial;ra„,ations      ..'.'.'""  .^^^^■ 

•^■i".  Hranclirs   in    ]nni-n   Countries      ...."'  4^^ 

•■'■'l-  (ail    Loans  in    \(  w   '^'ork  ! 

•'•'-•  '.  all    Loans   in   (  anad a    ... 

•'•'■■'•      '■"'"•" '•"i"^'   ""i    I'roniotion  of  Corpojations      '       '       'tJ, 
.'■».'M-.       Loans   t,,    Dirrctors "        '        "  '. 

5.'ia.      Hanks  an.!  tlu   Trust  Con.i)ani,s       .  ^^^ 

r>:Hi.      Intrr.sl  Cliar-rs  in  tiio  W.st .' 

r>:'7.      Hanks   ,,f   .Suiall   C.ipital !!, 

.'■>.•!«.       Intrr.st    on    D.posits      .       .       .       ,' * L'^ 

.''•'i.O.      FinanciriiT    tli.'    Crops     ....*.' ^i! 

r-M.  .Mo\in«  til,'  Western  Wheat  Crop   .       •       '       !       '       '       '    4-1, 

r>il.  (^^'ommereial  L.tters  of  Credit  in  Canada  .       .'       *       '       '.jl- 

.'"'I-'.  Cinadian  Clearin^r  11,, rises  .       .                             ••••/( 

480 

CFLM'TLH   X.        ' 
TFIK    n.WKS   AM)   THK     .,/Vi' "{NMK.nt. 

.'iLS.      flovennnrnt    Ndt.-    Issu<'s 

r>n.      T.-ixinir   tlie    Hanks  *        ' 

M.-,.      Montldy  Statements   to  ti.e  Government    .       .  "       \i)„ 

."•K..      flovernnient    Postal  and  Savin-s   Hanks      ..."       *       '    ^qr, 

.'ii:.      C|„aper    Affrieiilfnral    Credit '  tqs 

r>i>i.      Co-operative   Cndit   SoeieH.s    ....  "       "  /' 


MONEY  AND  BANKING 

PART  I:    MONEY 


CllAPTKR  I 

FUNDAMKNTAL  ECONOMIC  CONCEPTS 

1.  Reasons  for  Uic  stiul//  of  inonri/  and  Ixiiikiu^. — 
The  study  i»t'  iiioiua'.  I'unriu'y  and  hankiiio'  is  iieccssary 
to  every  person  who  desires  a  thorou^h<^'oing  knowledn-e 
oi'  business.  Kvery  one  who  has  to  deal  with  prices, 
w  hetlier  he  be  a  prochieer  or  a  eonsuiner.  a  working-  man 
seHin<i'  his  ser\  iees  or  a  capitahst  neeivinj^'  interest  on 
his  investnient'^,  in  order  to  oonthiet  liis  atVaii's  intelh- 
yently  must  understand  llic  forees  alfeelinu-  |)i-iees  of 
tlie  commoihties  or  the  services  in  whieli  he  is  inter- 
este(k  Kvery  Ihietuation  of  price  allVcts  the  welfare 
oC  everv  person  who  buys  or  sells,  and  the  ability  to 
I'oresee  these  thietiialions  enables  the  business  man  to 
avoid  loss  and  ^ain  profits. 

The  s('<n('e  ol'  money  and  l)ankin,n-  deals  v\i'h  jjriees. 
and  attempts  to  explain  thiir  tluetuations  so  I'ar  as  the 
cause  of  tin  sc  tluetuations  is  due  to  ehauHes  in  the  con- 
ditions of  currency  and  hanking-.  TIk  inlhienee  of  eur- 
rciK-y  and  bankin<4'  upon  prices  is  much  moi-e  unporlaMl 
than  is  gciKM'ally  supposed. 

Kverv  brsincss  man  miderstands  tiic  Ihieiuaiinns  of 
tli.ii  .ii-j.  !.!',,!!"ht  ;!b'-i!!!  !.'\'  alt(  ratiiu's  in  the  siiiiiijv" 


price  t! 

of   or   the   demand    for  commodities  or  services. 

VII— I  1 


II< 


a  MO.NKV   AM)   l$A.\JvlN(; 

knou s  when  five  nun  arc  hi,l(li„o-  f,„.  „Me  article  that  the 
price  will  o,,  up,  and  that  wlien  five  sellers  arc  ()frerin<r 
their  goods  to  one  man  the  price  is  hkclv  to  o„  do^^n 
He  is  not  hkely  to  u-iderstand.  however/ how  prices  in 
general  nuiy  g,.  up  in  conse(]uence  of  a  new  (hscovery 
"f  gold  m  the  Klondike  or  an  increase  in  the  amount  oV 
I'ank  crc.ht  outstanding,  ^'et  these  hitter  forces  are 
.inst  as  pofrnt.  and  even  more  enduring,  than  the  former 
in  affecting  jxiccs. 

To  offset  the  enormous  (himage  chargeahle  against 
the  panic  of  1!)()7.  mc  must  place  on  the  cre.h't  side  of 
the  account  an  item  whose  importance  is  hecomin-.'  more 
and  more  apparent.  This  item  is  the  education")!'  the 
Anuncan  business  man  in  the  science  of  currencv  and 
l>anku,g.  at  least  to  the  extent  that  he  appreciates  as 
never  hefore  the  relation  between  a  defective  currency 
system  and  his  own  prosperity.  lU  feels  that  much  of 
the  loss  and  suffering  of  that  .lisastcr  was  unnecessarv, 
'••"!  that  m  tlu^  luture  the  severitv  of  panics  mav  be 
consi(leral)|y  mitigated. 

U  an  architect  should  plan  the  construction  of  a 
l>nd(hng  which  collapsed  in  the  first  severe  storm  he 
would  probably  be  lu  Id  for  criminal  neglect  in  .jisre- 
.uanhng  the  ja,vs  and  principles  <d'  sc,  ntific  cnstnic- 
f'<"..  Shouhl  not  the  architects  of  our  currencv  a,.d 
''■Hiking  systems  be  held  e.,ually  responsible  for  (he  i„l- 
lapse  ..f  their  structures  when  they  have  .lisregarded 
scieiitdic  i)riri(iplc.s  clearly  established:' 

The  study  of  the  science  of  eurrencv  and  bankin-  is 
"<'l  o,dy  obligatory  upon  the  archit.rts  ,,r  ,,nr  rnnu..t"rv 
system,  but  it  is  also  profitable  tr,  those  who  must  adap't 
their  business  to  existing  sysleTus.  I  f  the  system  is  de- 
'.'"'■  "'''■•  ■■'''"''  '^fiow  ]),,n  iu  escape  Uu' eoiise(|uences 
ol  such  defect.s;  they  must  know  enough  to  move  out  (.f 


1  r\i).\.Mi:N'r.\L  i'conomic  c()N(  i:i"rs 


the  huildiiii^'  when  the  iirst  cracks  appeal"  in  the  walls, 
or  when  evidences  of  a  storm  are  manifest. 

2.  ]\'(inihti::s  of  Ihc  IHu;  jxinic. — During-  the  winter 
of  1I)()()  and  tlie  snmmer  ol'  liU)7  the  economists  and 
stndents  of  finance  had  sent  out  hulh  ins  of  warnini>' 
and  displaye('  storm  signals  of  the  ap])roachirii4'  lroul)lc. 
'I'he  intelhu'ent  na\  iyator  of  husiness  craft  who  could 
undci'stand  the  siwiiifieance  of  these  si^iials  sailed  close 
to  the  shoi'c  or  kc|)t  in  poi't.  while  the  iieedless  and  igno- 
rant put  np  full  sail  to  take  adxanta^e  of  the  hi'ceze  of 
prospi'rily.  and  found  themselves  cau<4ht  iiiun\ares  iu 
the  s(]uall  of  Octoher. 

'.i.  SciciiCL'. — Science  is  the  stud\-  of  tlie  I'elation  of 
cause  and  efl'ect.  Man  has  an  inhorn  curiosity  to  know 
(he  reason  foi-  thin<4s.  in  oi'dei-  that  he  may  he  master  of 
his  cnxironment  and  that  lie  may  know  how  to  produce 
desired  effects  through  his  jjowir  o\ei"  the  causes  pro- 
(hicini>'  those  effects.  'I'henl'ore.  our  ultimate  aim  in 
Situdyin^-  the  sciince  to  which  \sc  \vd\v  addi'csscd  our- 
selves is  to  he  ahli'  to  make  use  ol'  such  knowledn'c  in 
increasing'  our  husiness  efhciency.  and  a\()idin<.i'  waste 
of'  elfoi't  in  materials  thiou.uh  iynorance. 

Money  and  Hanking'  is  a  pai't  of  the  scitrice  of  finance, 
which  in  tui-n  is  one  o\'  the  hranches  of  the  more  ^^cni'i'al 
suhjeet  of  I'A'onomics  or  political  economy. 

1-.  Finniicc.  Political  Kcon<tmy  is  the  science  of 
husiness:  that  is  to  say.  the  science  of  the  relations  of 
men  with  each  other  in  the  jjroduction.  consumj)tion. 
distrihution  and  exchanu'c  of  uoods.  l*'inaiu'e.  one  of 
llie  sididiv  isions  of  llie  lieid  of  economics,  deals  with 
conlrol  of  property,  (sp(ci;dly  with  that  form  of  |)rop- 
ei'ly  which  economists  c.dl  the  production  aoods.  '.  c. 
land,  natural  resources,  factories,  ra.ilroads,  machinery, 
etc.     Control  of  property  is  attained  tin"ou<ih  chan^'es 


! 


i 


MOWS   AMI  llANKix,; 


."'  ""',"■"'' '"•  i'"-«-M.,„  „r  II,,  i,ij,,|,„t  ..moi,,K-v 

'",  '''■'"''"■'"■"   « I»-      l'"'»"cr.  thc,vr„rc,  is  a  s,.!,,,,', 

"Im-I,  t,-,.ls  „r  II,..  .«c„,l,li„«-  a,„I  ,„„„aKc.,„.nt  „f  c,-,,,- 
'  "I.  .-."Htl,,.  I,  ,■,,,;,,  ,1,,  |,,.,,,,,|,,t  ,,,,,^,  it„|,„jj^^ 
"'     !■<■  "rH,.., Is  ,„„|  ,„.s„,,„„.„,s  „s..,|  „„.c,ssan-  t„  tl,is 

;■'"';  '""7  ""■''"'"'"■  ■""■'<>■ '" m,ki„K.  M ■„,,.  ,„„, 

';"''^"'«-''" "lilii'iMsIr .■nts,„„l,„..fh„,ls.tl,;,„„,|, 

'"■  ..«v,„-.v  „r  ulnH,  II,.-  ..x,.l,a„,„,,  ,„•  ,„,,,,,,,,,  ,„.  ;;„ 
l-.Hls  ,s  a,v,„„,,I,sl,..,|.     Tl,..„m,„„|,.„|,i,,,„|.;,|||,„,.. 

"" ''■   '""    l""''"<'f    '■■   ll'^'  .■"„s,„„..,.s.      Wealth   i, 

"';■.  f'"'™     *;■'■ I"'-''    -'-I'"!--   ^.n   ,„at,,-ial   tl,i„„s 

tl  -    tl„„«.s  „|„..|,   „„,,„,   H,c.  .,„alilv  ,,,ll.,|  „tililv 
»  "c  .   ,s  .,,,,lv  ,1,..   p„^^^^^^^ 

'    <     >    .;.■   „„l„-,,-lly.       In  .ml.T  In  ,.,.,,,tr  Ihis  .|„ali,v  „f 

;;'''''>,;■' '''^''7';'''|"''«-fisM,.,.ssa,,v -i,,,!  „,.,;, 

t      V  U   „.s:  lal,.„.  „at,„,.l  ,.., -.vs.  a,.!  ..a„rial  :.„„|, 

1  l"s  la  t,,.  t.™,  ,„..i„,U,  all  tl,..  a,-tili..iai  i„sl  „„ic;ts  „f 
;"■"''"'"■;";-■-     l."il.li..«..     ,-ailn,a,l.s-„hie|,     l,a 

.-..  Ta-I,„„hg,i    ,„„J   7.„.v;„,-.v,v.~  I„    ,,.,;,.,-    <.nlcrp,-ise 

'-:•■  -\t""  ''-'"-t  -1.-  ti-t  is.  a  t,,.i,,,ical       ,U 
--  -k.      Tl...  ,„a„„ra,„„.,,.  ,„„.|  ,„„  „„,,  ,,„,, 

; ''  'f^-  "'^  •'"■  ''-^t  ""'l-ls  ".1.1  l"-.K.c.ss,..s  r,,;.  tun,. 

-K  "..t  h.s  ,n„l„.,,  I,„M,,  „,„s|  k„„„.  l„„v  t ,,,, 

'"•■'  .na  s    |,„...  |„s  ,al..„,  ,,,,„,  „„,   ■  „,,^,  ,  .^ 

ilJI.I   sell   |„s   |in„|ii,.|.  >^.i|MUH 

"■■•■"""""'■■.  has  ,„,tl,i,,o.  I.,  .,,,,;,,,, I,,  |,.,.|,,,,_.^,, 

.'  '"•'"'«■   I"' -il,„aon..„i|,„,, ■„,ll,,h,.<.„„stmo- 

";.i"l...a..h,n..  i„,„a„,„a,.„„i„„..      ft  ,.„„fi,„.s  ils" 
■|"c,.v  t„  u,,  si,„iv  ,„   II,,  ,„.„,„„.ali„„  „„,|  ,,|ali„„;„r 

"'^' ""'"■ '''^''o'-^  "'■  l""'l"<'<i"M.  Ia,i.h  nal,„„|  ,.,s,„„.J, 


( 


FrNDAMKNTAL    i:(()N\).MI(     (ONC  Kl'TS  r> 

and  capital  o()()(ls.  If  cxcrybody  {)ro\i(lc(l  I'or  his  own 
wants  first,  hy  ])r()(luciii^'  what  he  coiisuincd,  there 
would  l)e  no  such  tiling  as  husiness  and  eeononiies. 
IkisiiRss  he<^ins  the  moment  one  peivson  prodnees  some- 
thing- for  another  hut  de|)ends  upon  another  to  supply 
him  hy  exchange  with  the  things  he  needs.  Since  i)rac- 
tlcallv  nohodv  is  economicallv  self-sutlicient  in  these 
days,  cveryhody  is  concerntd  w  ith  husiness  jji-ohlems. 

0.  liitsi>i('ss  iJic  rcsidf  of  spccudrjiiUni  of  labor. — 
This  fact  of  the  uni\ crsal  division  of  lahor  or  specializa- 
tion of  lahor  is  the  vei'v  foundation  of  our  eeononiic  sys- 
tem. The  ])rocedure  of  a  modern  man  in  supplying-  ifis 
wants  is  \ery  indirect.  If  he  hasn't  some  already,  his 
first  move  is  to  supi)ly  himself  with  money  which  he  ex- 
chanyes  for  the  ^fjods  ^ith  the  merciiant.  The  mer- 
chant has  previously  ac<|uired  the  ^oods  in  a  roundahout 
May  tln-ouoh  the  channels  of  trade  from  the  ])i-()ducei's. 
The  producers  ai'c  organizations  of  men  who  take  the 
material.-,  fi'om  their  natural  state  and  work  them  up 
into  finished  ^'oods  capahle  of  satisfying-  human  wants. 
The  work  of  the  world,  in  which  we  ohscrve  nearly 
e\ cryhody  so  I)usily  cn<>'a,i;ed.  is  ])i'0(hiction.  Sometimes 
it  re(iuires  very  close  anal\sis  to  discowi-  how  some 
occupations  assist  in  ])repariny  noods  foi-  eonsumj)ti<)n 
and  use.  At  fii'st  siyiit  such  occupations  as  l)aid-:in_u'. 
hrokera^c,  accountiiif^-,  etc..  st'cm  to  haxc  little  to  do 
Avith  the  production  of  <^()ods.  and  yet  as  we  shall  see 
Curthei-  on,  they  arc  as  neccssai'v  and  elfective  to  this 
end  as  aoriculture  and  inanufacturin<i-. 

7.  Product  hill. — To  create  the  greatest  utility  in 
;4oods  that  Is.  to  <x.'vv  them  tlu-  maximum  powci-  to  sat- 
isfv  liuman  wants,  thcx-  nmst  he  oixcn  th.e  nroiirr  fonn: 
they  must  he  ready  foi'  consumption  at  the  ])i-oper  time 
and   in  the   pi'oj)er   ])lacc;  and   lastly   they   must    he  in 


6 

the 


M()M;v   AM)   B.WKlSa 


:.^::^::;;;;:;::;:;:::;t:;';:,tr''-'''' "- 


;;■'-■  ^-K' to  „,,.,H,..,.,,,,,i,,,,,,-;,;;:;;-;;;>""^;^-.n 

P^'-sons  maU.  utility    just   -is  in.lv    n     '"""•      "'^■^^' 
>;''^"'^   '■""'^■••<'>-tIuM,uniuradMrer. 


"i.y-.      Cnd 


money  and  hank- 


'"   *''^'  amount  <./•  utihfv    -f  i'      r  ""'"'^ 

<IIMII\      at       IIS     (    isiKwi  TI    ' 

tHH,  c,l-  exc-han-.e  is  reh,fiv<  K-  ' ,    '"^;*''-       '  '"^  "P^'ni- 

"-Ha ,'.,,17: ^'.';: :'■■','';";'.''- '"'■''-■"•'■"■"piish- 

vicvs.  '    ■"■'""""■"■•  iiii.i  ii,j.viij,,,,s  iIl- 


I 


FUNHAMKNT.VL  ECONOMIC  CONCEPTS  7 

All  our  modem  material  civilization  is  practically  due 
to  the  extension  of  the  principle  oi"  the  division  of  labor. 
It  is  only  Mithin  the  last  century  or  two  that  the  whole 
])opulation  is  ennaurd  in  producin<r  things  which  they 
do  not  intend  to  consume.  The  enormous  increase  in 
elHcieney  of  this  method  over  the  methotl  of  each  ])r()- 
duciiio-  for  himself  is  instantly  a])parent  when  we  reflect 
on  what  portion  of  the  wealth  which  we  consume  daily 
woukl  he  ours  if  we  were  ohliued  to  produce  it  hy  our 
own  unaided  eiforts.  Now  this  whole  system  of  divi- 
sion of  labor  depends  upon  the  exchange  of  uoods. 
The  products  must  find  the  consumers,  and  this  involves 
from  one  to  one  hundred  chani>'t's  of  ownershij).  There- 
fore we  see  that  our  modern  civilization  has  been  de- 
pendent upon  the  growth  of  commerce,  and  future 
developments  in  the  division  of  labor  will  depend  upon 
tiie  facility  with  which  its  various  classes  of  conmiodities 
can  be  exchanged. 

9.  Tardji  recognition  of  value  of  iwchnngc. — It  is  a 
curious  fact  that  this  most  vital  ])art  of  civilization  and 
commerce,  money  and  banking,  has  not  been  understood 
and  ai)preciated  until  recent  times.  A  few  centuries 
ago,  the  merchant  was  regarded  with  susjjicion  and 
})laced  not  far  above  the  thief  in  the  social  scale.  Tiie 
luerchant  who  bought  an  article  for  $1  and  sold  it  for 
$E.)0  was  thought  to  have  robbed  the  purchaser  of  .)() 
cents.  The  banker  who  loaned  money  at  interest  vio- 
lated one  of  the  laws  of  the  church  which  forbade  taking 
of  usury,  as  interest  was  called  at  that  time.  Tt  is 
oidy  in  very  recent  times  that  the  ])ersons  who  perform 
this  most  vital  economic  function  of  exchange  -the 
bankers,  financiers,  brokers  and  merchants — have  been 
understood  and  a])])reciated,  and  even  yet  we  find  the 
medieval  idea  still  j)revalent  among  a  large  class  of  peo- 


-Hon :.::::  rr^-:;:::;:  ••:,['";:'-■■■-"  '-^- 

"■Iv.     ir  uc  t-.k-,.  .,         '  ''"'''"'  Pn>atu  |,ro,. 

an,l  „tili.„ti, !•     '    ,     ■    •"  ^"•'"■''  *!«■  I>"«rv.li.,„ 

'■'"'•i'""    ..(■  llUM,-m   ,.,,.'',•'    "I"'i""-"t'>l-tl..-  lull 

I>er.s,>„  Is  „c.,ltl,v.  „e  nn.,,,  tl,-,t        I  ""  "">■  " 

--.''■™ii';;:;;i;,:';f:^  rT"'"-^-  ""^^'""'  -  "-»>■ 
"r'- -■-'";  ::^:"..:n::''::  ;::::;;:::■- 


'"   "■"""""'■  s.rvice  of  the  uier- 


1 

f 


FUNDAMEXTAr   lUOXO.MIC  {()N(  r.I'TS 


I 


sliarc  of  c()r[)()rati()n  stock  is  a  claim  to  a  certain  portion 
of  tlic  cariiiii<^'s  ol'  a  coi-poration  set  aside  by  the  direc- 
tors as  a\ailal)le  for  dividends,  and  in  case  ol'  llie  dis- 
solution of  the  corj)oration,  to  a  portion  of  the  assets. 
A  I'nited  States  note  or  <^reenhack  is  sini|)ly  an  evi- 
(K  ice  of  a  claim  against  the  (io\ernment  for  payment 
ot'  a  certain  number  of  dollars  on  demand.  The  fact 
that  it  is  readily  accepted  by  evciybody  in  exch'ui^e  for 
wealth  does  not  make  it  real  wealth. 

A  ^'old  coin  is  ..al  wealth  to  the  extent  to  which  the 
meta.  it  contains  has  utility.  In  the  case  of  all  the 
other  forms  of  money  we  are  con  {'routed  with  a  prob- 
kin  whether  to  classify  them  as  real  or  rej)resentative 
wealth.  Money  undoubtedly  has  an  indirect  uHlity  in 
so  far  as  it  assists  in  ])i-oduction,  and  would  seem  to  ^o 
alon^-  in  the  same  cate<.>;oi'v  as  railroad  cars,  wiiich  in- 
crease the  utility  of  noods  by  niovino-  them  from  place 
to  })lace — money  increases  the  utility  of  goods  by  mov- 
ing them  from  owner  to  owner. 

\\'e  have  seen  how  the  division  of  labor,  where  nearly 
everything  is  the  subject  of  pi'ivate  property,  recjuires 
continual  excjianging  of  wealth  in  order  that  it  mav 
.'ome  under  cr-itrol  of  the  ])erson.s  wlio  can  best  utilize 
it.  There  is  another  conseciuence  of  tbe  division  of 
labor:  It  re(juires  that  the  factors  of  ])roduction  l.e 
organized  in  great  groups,  in  order  to  be  most  effec- 
tively utilized. 

As  the  result  of  this  tendency,  we  have  tbe  United 
States  Steel  Corporation,  with  its  1.50.000  men  working 
with  a  billion  dollars'  worth  of  natural  resources  and 
ca|)ital  goods,  and  with  the  ])roduction  of  iron  and 
steel.  This  grouping  together  of  a  large  number  of 
industries.  (M-iginally  indej)endent  and  sepai'ate,  has 
eliminated  a  vast  num))er  of  e:"    i  anges.     From  the  ii"on 


'^.\\ 


10 


-MONEV  AM)  ISA.VK.^. 


ore  at  the  n.inc  to  the  finislicl  steel  rail   there  i,  „„ 
ohnnffe„f  „„Mer.hi|,„(li,e,„„t.™ls 

1^.  l„lc^-c,ti„„  of  /„,/«.„,/..    .\,  :,  e«„seq„ence  of 

tl';   '  l>d„,e.      I  he  ee,„„„„y  „r  ,|,is  i,ileK,ate,l  te.ulenev 
-I    '"'■  ""..e  a,,,,a,e„t  ,vh.„  „e  have  learned  h.,«  i  ,      ^ 

la,l,  „  ,„  I  e  „„,.|,a„,s,„  .„■  exehanse  t„  w,„-k  ,„■.,,,- 
ulu     As  >ve  .l.erease  !h.  ,„„„he,-  „r  exehanifes  in  lie 
'"■■'"■'I    l;™  ..H,o„.  we  .educe  hy  s„  ,„„eh   Ihe  ., lo 
tiiiiitas  l„i-  hreakd.ivviis.  ™ 

These  |-,mda,„e„tal  ee„„„,„ic  faets  a„d  |„i„el,,les  are 
n.ent„aK.d  I..,,.  , „,„,,e, he  anient  a, ,,■.,,,',.  i.lea,,r  the 
!'"l-lnal  syste,,,.      Voney  is  an  h.str ent  an.i  hank- 

Ik -ehy  n,e,.ease  the  n,a.e,iai  n.llare  of  ,!,.  ,„,,  ij 
'■!;■;'""'■"«"-  -l'en.sal,l,.  .,., s  ,„■  , 

;;""■"  "  "•'■  ••'"  ""-■  vr .live  e,r,„,  no.    ;;j 

H      al,ae,..n,d'i,se,liea.        ,.  V,  hieh  « e  sh,      . 

stdl  he  ,„  the  state  ,W  indnstna!  harharisn,. 

'';."'"' "*"l"-iv.'de,. rn,,e,-tvi.n..t.  as  a  sreat  n.anv 
"','"''    ""•'-'■':•  ""-'^-m  the  hnn ,ni„d:  I?  is  a  ,„,  i 

neral          *",       li""'  '"■""'"""  '""'''''^  -.nnnnnsn:  is 
"'       ■"■™'l""" ^M-"liarly  personak     The  «,., 

''•'"«"'      "-'^  '"'"" I'vidnals,   hn,    heU.,,,, 

^tr:jr\''"T'''''"''" l«i'-'--liH.lhana„v 

coiitiMC't  of  ,fi//(f  pro  qiu). 


CIIAl^rKR  II 


KX(  IIAXGE 


1.*}.  Ec^;lnnin^  uf  cvchuiigc. — lU'^iilar  cxcliaiige  did 
iiot  t  xist  until  oiu'  tribe  had  a  .surplus  ct'  j-articulaf  com- 
inoditii's  wliicli  were  desired  by  the  tribes  lia\in^'  no 
facilities  for  produeiny-  tiieni.  These  artieles,  which 
W'-re  sui)erHuous  in  the  tribe  j)i'0(iuein^-  them,  had  a  j)e- 
euliar  vahie  to  olliei-  tribes  whieh  ])erha])S  eould  not 
produce  them  at  all.  If  Ihese  commodities  happen  to 
be  of  an  imperishable  nature,  as  pottery,  weapons  or 
furs,  they  mi^iihl  easily  come  to  have  a  ux'  as  a  medium 
of  exchange  i'or  home  products.  'I'he  necessity  of  ob- 
tainiu;^-  such  commodities  from  otlu  r  ti'ibcs  gave  IIk  lu 
;i  kind  of  lixcd  \alue,  and  thus  llicy  became  the  most 
convenient  standard  by  which  the  xalue  of  all  other 
thiniis  could  be  compared. 

In  the  c\olulion  of  nionex  a  \ast  numbi  r  of  thin;..?s 
have  been  used  foi-  tlu  |)urpose  of  tixin*;'  \alues.  but 
practically  all  of  them  represent  sinplus  products  which 
could  be  exchanged  with  foreigti  tribes  or  nations  for 
imported   wares. 

Ivxchanging  of  goods  within  the  tribes  was  a  \('ry 
slow  development,  and  when  it  did  dcNcIop  it  was  most 
natural  ior  these  articles  ot'  foreign  origin,  with  a  fairly 
<!(  finite  exchange  \atue  already  fixid,  to  become  the 
common  mt dimn  of  exchange  and  standard  of  \ahic. 

r>\  >>Miii  authorities  economic  history  has  been  di- 
vided into  thi'ii'  stages,  aci'ording  to  the  method  by 
which  exchanges  were  made:  liartcr,  money  and  cicdit. 

11 


r       T7 


^ 


IS 


^"IM.V   .\M,  liANKix,; 


III  llii^^  tirst  or  ■■|,:„.|,.,."  ,, 

.«""il^-      III  tl,..  sc-c,„„l  ,   :f    *"";-  "'■'■'■  '■«'l'»'i«"l  l',,,. 

■■.".■-•ii.,,«x.a,,iii;  ".:«r ;:::'■' f '^ ''•"'- i-.! 

■iianwii.iiiiv     ,,    ;V    '''"'^''''''''■"'■'I'ltiiitv  .f„. 

^'---l^;™^,  ■':,;';::■''*"'',';'■ "*'«-..,„„• 

'"•Ills.  t„l,a«-c,,  etc    ,■.,„„,  t„  I  '■'■  "''"'"■ 

<"iii<'  f"  the  stn.lv  „|    ■,,|,„.-  ,1    ,  ■'"  "'■'■  "''"I  "<■ 

'■^"■'■"■■^"IlK'l,    C.„,|-,.sv  ■   "'■    ll„.    |„.i„,i,,,i 

extra  exd,„„„e  ,  ^      "  ""  f  .""'^  '^  '"i'".-     This 

14     liar  I       '1^1       r 

"'■  ^'i'p'"V"..ii>  .  :; ':;:r^^■  t;^'''«"' -^ 

''•■"^i..V,va,-h.,r,      ',"'"'''' '"''■l""^'l''»cc 
'<■ iiiiliilus       k  "^^ 

'-nH,st,h,,i.„n., ''::''' ^'" '■■•■'•''■ '"'■<■ I. 

''"Ki.'i«M"i.i,Hi..d  ,,!,';:.';;'■'■■  ~ "'"''''''■''« '-i- 

""•  I'"".  !■> .1  UK , ,  .1      ;','"'■  ''"■■""">■  "'■  '"'"I ^1' 

'-■i--^i«v,  ;r   ,:';■''■ '' '"""""■■'•  '■•"ic 

'■-■'"ill  iimi  ii     ,     ,■■        T  "■"' '"  '•'""'^^  -"I  '"I- 

--..■ .'.:::  an-:  :';'■'"'!  ■■ '■  "■  ■- 

t..    Ml     ,■ ,1     „,,„„,,,     ,  .■  "    ."•'■■     il-«.ll.l".IS     |-,„-     „„„ 

-■-■-iti., ;;: -''"rv  ■■";■''••'''«'■  * '^"'■"•^' 

np„„.  ■     """•' "'-""''I   ""I    I-  .l.:.,n,k.,I 

15.  Moucif.-^  M,„,.  ..  : 


( 


EX('IIAN(ii: 


i;3 


])nt  wlicn  it  is  cxdmn.ucd  for  other  coinnuxlilics  we  do 
not  call  the  operation  hai-ti'r,  although  it  is  an  exehan^-e 
of   ,ii<>otls    for   <4()0(ls.     'Llie    I'aet   that   one   of   the   ex- 

niaed  articles  is  accei)te(l  solely  beeanse  it  can  so 
easily  be  exchanged  for  something;  else  whieh  the  hohler 
reallv  wants  for  nse  or  consun!i)tion,  introduces  an  en- 
tirely new  principle. 

Trachnu'.  whieh  was  so  limited,  clumsy  and  iniccrtain 
ill  the  stat^^e  of  barter,  now  beconu  s  easy  and  irnular. 
If  1  have  somethinu'  of  vahie  I  do  not  havi  to  look 
ai)out  to  search  out  the  person  who  not  only  wislies  to 
])ossess  it  but  who  has  somethin<^-  whieh  I  need.  I  have 
simply  to  tind  a  persor.  who  has  money,  because  I  know 
tiiat  by  accepting- n..)iiey  I  can  «jet  whatever  1  wish  with 
it.  Kxi-han<rcs,  therefore,  become  three-side<k  I'irst, 
the  ti'a(lin<4- ol"  g-oods  for  money,  and  tiien  of  UM.ney  for 
o(„y,is.  The  first  part  of  ihc'  operation,  the  exclian<iinn- 
of  uoods  for  money,  is  but  the  lirst  half  of  the  comi)lete 
exchan,ur.  Tiitil  the  money  has  beei;  pent  there  is  a 
sus|)endi(l  exehanuc.  AvhiJi  nmst  lie  t.  mpleted  sooner 
or  later  by  the  exehan«4-e  of  the  money  for  yoods. 
'I'hercforc,  all  trade  is  finally  barter,  and  the  use  of 
one  commodity  in  this  peculia  ■  way  as  money  compli- 
cates, but  also  o-reatly  facilitates,  exchanging-  ol"  goods 
for  <>oods. 

1<).  Minu'n  represents  incomplete  crehau^es. — All 
money  existing  at  this  moment  rc]u-escnts  incomplete 
exehanu'es.  Hvery  ijosscssor  of  it  will  soont  i-  oi'  later 
otfer  it  for  goods,  because  money  has  no  use  ixeepl  to 
be  spent.  'I'herc  is  no  utdity  to  be  had  from  it  until 
it  is  |)art('d  with.  i'he  miser  perhaps  realizes  a  i-ertain 
satisfaction  fiom  the  mere  jjossession  of  monew  but 
with,  the  r:ition;il  iierson  the  possession  of  money  repre- 
sents a  posti)on((l  satisfaction.     Quite  naturally  the  an- 


I't 


M()m:v  anf)  banking 


ticipatioii  nl'  future  satisfaction  to  he  obtained  is  (j-iite 
pleasurable,  but  to  say  that  thr  money  rather  than  the 
aiiticipation  is  the  source  of  the  satisfat '-On  is  to  fall 
into  confusion  of  thMonht.  'fhe  boy  with  the  circus 
ticket  in  his  hand  is  d  with  joyous  sensations  when- 
e\er  he  gazes  upon  n,  A  railroad  ticket  to  California 
conjures  uj)  the  sniell  of  orano-e  o-roves  and  other  de- 
lightful things,  lint  neither  of  these  thinos  is  the  real 
source  of  the  gratification.  The  miser  is  the  l)oy  who 
prefers  to  miss  the  circus  rather  than  to  give  ilp  the 
ticket. 

17.  Credit,  a  postponed  /xiz/meitt  of  m  one //.There 
is  a  third  stage  of  economic  evolution  bcyniid  barter  and 
money— the  credit  stage.  .Tiist  as  exchanges  were  lim- 
ited and  chimsy  in  the  barter  stage,  necessitating  the  in- 
vention of  money  before  men  eouM  s])ecian/e  in  |)roduc- 
tion  to  any  grewt  extent,  so  the  time  arrixcd.  in  the 
Middle  Ages  jjeriinps  (although  Hie  use  of  eredit  was 
not  unknown  in  the  ancient  world),  when  iiKMiey.  e\  en 
the  most  !•(  tilled  forms  and  systdus  df  money,  liecame 
too  cumbersome. 

In  this  last  stage  exchanges  can  l)e  made  NviHiout  the 
use  of  money  at  all.  A  man  uv.y  be  ;ii)le  to  buy  and  sell 
without  |)ossessing  an_\  money,  or  even  ;'.ii\-  [uoperty. 
The  consideration  he  gives  may  be  merely  a  promise  to 
pay  money  or  its  e(|uivalent  value  at  a  future  time.  In 
this  last  stage  exchange  frees  itself  entirely  from  former 
limitations  and  under  speeiali/ation  of  industry  can  ex- 
t<  lid  liiitil  scarcely  any  man  |)roduces  the  thing  he  liim- 
s(  If  consumes.  Kverything  is  i.rodueed  for  the  market, 
■•ind  the  market  does  not  fail  so  |..ng  as  the  maeliin- 
er\    of    credit    is    working    sniootlil\.      I 'nfortunately, 

ci'cdit    Is   lil.i'   fli-/.     .iilI    ;♦ :..    ..li    ..11        -ii        •   1      I      . 

■    ■■■-";    :'~    "..-■.     :'.    .;  I  ; ;  ;  ii  ii',' i    "i">iiri    i'iSK,    i>ur 

iiolx   ly   w,.nl,|  think  of   foregoing  the  use  of  tire  j)e- 


i:x(  iiANcii: 


15 


cause  liouses  sometimes  burn  down,  nor  would  auyl)ody 
advocate  the  abolition  oi"  credit  because  .soinetinies  its 
abuse  brin<4s  on  coniniercial  ilisasters  and  panics. 

Throughout  tliis  book  the  word  •Y're(Ut"  will  l)e  used 
in  a  strictly  technical  sense,  that  is  to  say,  with  the  fol- 
lowiiio-  niJaniuir:  Cmlit  is  a  fiostponcd  pajimcni  of 
mniu'ii.  The  word  is  employed  in  ordinary  nsa^e 
to  mean  the  ability  to  borrow.  Thus,  a  person  has 
oood  credit  when  his  reputatio?i  for  financial  inte;'^- 
rity  makes  it  easy  for  him  to  borrow  the  funds  or  i)rop- 
(.rty  of  others.  Much  of  the  ditliculty  and  confusion  i.:- 
herent  in  the  discussions  of  credit  j^row  out  of  this 
va^-ue  usa<re  of  the  word.  If  it  is  kept  in  mind  that  a 
cre^lit  is  a  perfectly  definite  th.inw-.  i.  c.  a  i)ostponed 
l)ayment  of  money,  clear  thinkin«>-  will  l)e  possible. 

bur  definition  imi)lies  an  ineomilete  exchantrc.     One 
side  of  the  exchange  has  been  comi)leted,  but  so  far  no 
c(iuivalent  has  been  rendered.     The  payment  has  been 
postponed.      It    is   convenient,   however,   to   re«rard  the 
credit  as  itself  an  tMiuivalent  and  a  thiiio-  having'  value. 
If  a  merchant  sells  a  bill  of  ^oods  to  a  customer  and 
agrees  to  po-ipone  the  payment    for  three  month.s.  he 
has  received  foi"  the  ^cxxls  a  jjromise,  which  is  valued  by 
liim  as  the  full  ((luixaleiit  ol  the  ;^(„)ds.      If  this  j)rom- 
ise  is  put   ill  the   form  of  a  promissory  note   (which  is 
simplv   a   documentarv   evidence   of  the    promise)    this 
])romissorv  iiote  is  a  concrete  object  ol    value  and  can 
be  itself  exchanged  for  other  things  of  value. 

IH.  Cirdits  as  media  "f  twch a iifrc— The  fact  that  a 
promise  to  pa\  moiuy  i<  a  xaluabjc  thing  in  itself  sug- 
gests immediately  the  possibility  of  using  such  promises 
as  a  medium  of  exchange  if  they  can  be  put  into  such 

I  •        •       1 1  ■  I        i  :i  t       I  ,    i  I 

form    iiiai    iiie   o\\nei>iiij»    iil    Tiuui    .;;"   ;;;;■    ;;   ::•    ;;.■    ;::-::: 

can  be  trans iVrred  from  hand  to  hand.     .lust  as  tlie 


16 


MONEY  AND  HANKINCJ 


value  of  nionty  is  an  aiiifit-ial  (jiiality,  created  by  its 
ready  exeliaitoeal)ility,  so  credit  may  come  to  have  a 
value  for  l!ie  same  reason.  People  accept  money  read- 
dy  in  exchanoe  i'or  anythino-  else  because  they  know- 
that  it  n-ives  them  cf)nimand  o\er  any  j)iece  of  |)ropertv 
that  is  for  sale.  In  other  words,  because  it  i.s  converti- 
ble into  ])roperty  practically  at  all  times,  in  all  places 
and  under  all  circumstances.  Likewise,  credit  has  value 
as  a  iiudium  of  exchange  only  to  the  extent  to  which  it 
is  convertible  into  money  or  directly  into  pro})erty.  C'wii- 
vertibility  is  iherefore  the  very  essence  of  the  value 
oi'  money  and  credit. 

Money  we  saw  was  simply  an  indirect  barter,  the  op- 
eration beino-  len<«thened  by  the  use  of  an  intermediate 
tiling-  called  money.  AVith  the  use  of  credit  the  o})era- 
tion  is  stili  fuither  lenotlimed.  and  the  steps  in  the  com- 
plete transaction  may  run  as  follows:  (ioods  are  traded 
tor  credit:  credit  is  traded  for  money:  money  is  ex- 
channt'd   foi-  yoods. 

Sui)pose  a  mc'cliant  buys  a  bill  of  dry-<rood,s  fiom  a 
wholesale  establisiimti't  and  ^ives  his  three-months  note 
therefor.      The  w  holesale  house  may  take  this  note  to  the 
bjuik  for  discount,  reeeix  in^-  a  credit  on  its  deposit  ac- 
count.     \Vhe?i  the  note  is  due  tlie  bank  may  receive  a 
check    from    the   retail    merchant   who   made   it.     This 
cheek  may  be  cashed  at  another  bank  and  mav  be  i)aid 
out  auain  to  a  manufacturer,  who  has  received  a  check 
from   the  wholesaler  drawn  aoainst   his  deposit   at  tjie 
l>ank.      Tile    manufacturer    may    use   this    cash    to    buv 
cotton  from  the  eustdtuer  of  Hie  niei-ehan!  wIk.  consumt's 
the  dry-o'oods   first    bouohi.      Kedueed    to   its   simplest 
terms,   the  cotton    urow.  r  has   bartered   his   cotton    for 
clr.th,   i)ui    liie  iransaetion   lias  in\()j\ed  a   very   compli- 
cated series  of  exehauMCs  in  ordei    to  accom|)lish  it. 


I 


EXCHANGE 


17 


i 


i 


This  c'onipk'xity  iiitroducca  hy  the  use  of  money  and 
(  i-eail  ^v.)ul(l  seen'i  to  inercase  the  ditlL-ully  of  exehan^- 
i  in-  goods  for  o(„)ds,  hut  in  reahty  it  facihtates  the  proc- 
ess hnniensely.  While  seeniin-ly  the  most  expensive 
mode  of  making  exchanges,  in  reafity  it  is  the  most  eco- 
nomical. The  profits  and  salaries  paid  to  the  merchants 
and  l)ankers  are  added  to  the  cost  of  the  linished  clolh, 
and  the  planter  must  give  so  much  more  raw  cotton  for 
it.  hut  if  these  middle  men  did  not  exist  it  is  likely  that 
the  i)lanter  would  have  to  manufacture  the  cotton  and 
the  cloth  himself  at  a  hundred  times  the  real  final  cost. 
This  is  a  case  where  the  most  indirect  route  is  in  reality 
the  shortest  and  chea])est. 

10.  Mducji  (111(1  credit  rcpresrufdihrs'  of  xccalth.— 
Monev  and  credit  are  representatives  of  wealth  rather 
than  real  wealth,  l^iis  statement  seems  to  inxolve  a 
])aradox  because  of  the  hahit  which  lias  been  ac(iuired 
of  regarding  as  wealthy  a  person  who  has  control  over 
a  large  sum  of  money  or  credit.  The  ])o|)ular  concep- 
tion i)f  a  Mcalthy  man  is  very  likely  to  approximate  the 
caitoonist's  idea  of  a  rotund  individual  wearing  a  sdk 
hat  and  a  costumi"  witli  a  dollar-mark  pattern  and  sur- 
rounded hy  bags  of  specie. 

The  wealthy  person  in  reality  is  one  who  has  control 
over  a  large  amount  of  goods  or  real  weallh.  How- 
ever, in  est:  '  .ding-  wealth  we  find  it  convenient  to  reduce 
it  to  a  sum  of  dollars'  worth  rather  tlian  to  enu- 
merate all  the  items  of  goods  contained  in  it.  A  mil- 
lionaire is  not  a  person  who  owns  a  million  d(illars  in 
UKMiey.  but  whose  properly  rights  are  estimated  in  lerjus 
of  dollars.  The  millionaire  may  rarel>  have  in  his  per- 
sonal possession  more  than  a  thousand  dollars  in  money. 
j)iil  because  his  proi)erty  rigliis  are  more  or  less  iwii 
vertil)lc  ifto  money  we  fall  into  the  error  of  carelessly 
VII     ,> 


IS 


MONKV   AM)  n.WKIXG 


consideriiio-  I'm  as  possessed  ol"  a  miilioii  dollars.  Un- 
less we  think  elearlv  on  this  point  and  rid  ourselves  of 
this  error,  we  are  likely  to  find  ourselves  hlocked  in 
dealinn-  witji  problems  in  money  and  hankino-. 

Tile  value  of  money.  e\eej)t  in  the  case  of  metal  coins, 
which  have  a  commodity  utility,  is  dependent  ujk)!!  its 
convertihility  from  property  int  ,  ooods.  If  ever,\!)o(iv 
attemi)ted  to  convert  the  money  and  credit  in  the  world 
into  ooods  simidtaneously,  money  and  credit  would  lose 
its  value  entirely.  It  is  oidy  hecause  there  is  a  real  need 
for  this  ))aitieniar  kind  of  utility  in  makino-  exehan^res 
that  the  value  of  money  and  credit  is  maintained.  The 
value  oj'  money  and  credit,  then,  is  dependent  entirely 
uj)on  a  habit  which  })eople  have  of  accepting-  them  in 
exchange.  When  there  is  any  reason  to  doubt  that 
money  and  ci-edit  will  be  accej)ted.  we  find  its  value 
shrinkino-  away  and  are  confronted  with  the  phenom- 
enon of  a  dej)reciated  currency. 

20.  Classification  of  tccal tit. -There  are  two  kinds  of 
economic  <roods:  'C'onsumjjtion  nj-oods,"  which  have 
direct  utility  and  satisfy  a  iunnan  want,  and  "production 
^■oods,"  which  have  indirect  utility  and  assist  in  pro- 
ducino-  consumption  <j;-oods.  The  vahic  of  production 
li'oods  is  entirely  dependent  upon  the  c()nsumj)tion  broods 
uhich  they  help  to  produce,  /pist  as  the  value  of  labor  is 
d(  rixcd  from  its  product.  If  production  .^oods  or  lalfor 
IS  so  limited  that  it  can  produce  only  ^^uods  which  have 
no  market  value,  they  are  themselves  valueless.  Work- 
men may  be  e\er  so  skilled  in  certain  lines  of  work,  but 
if  the  product  is  unmarketable  they  will  look  in  vain  for 
employment.  The  maeliine  luay  have  cost  $1().()()(),  but 
ne' crtlKless  may  be  thrown  upon  the  scrap  Jieaj)  to-mor- 
row ii  tile  product  eeases  to  ()e  purchased  In  consumers, 


I 


I 


KXCIIANtil". 


li) 


or  if  aiiotlur  iiiacliiiR'  is  itivcnlcd  for  doing  the  work 
more  fhcaply. 

21.  Kntrcprcuvur   ■'■■//stcin.-    rroductioii   reiiuires   tlic 
cinployniciit  togvtlifr  of  land,  labor  and  capital  «;oods. 
rndcr  tlie  cor)])c'rative  systen)  tlie  owners  of  the  cai)ital 
ooods  and  of  th.e  hnul   unite  with  the  hil)orers  in   the 
pnxhietion  of  a  certain  conmiochty  and  divide  among 
themselves  the  pnuhict  or  the  i)roceeds  of  its  sale  on 
the  market.     'Fhis  system  of  industry  has  been  found 
kss  satisfactory  as  a  ride  than  the  cntrcprenenr  system, 
so  called.  l)y  which  one  man.  the  entrepreneur,  under- 
takes the  responsibility  foi-  the  industry.      lie  contracts 
at  a  fixed  rate  of  comi)ensati()n  for  the  use  of  capital 
and  land,  and  hires  his  labor  at  fixed  wages.     He  en- 
deavors to  reali/e  from  the  enterprise  a  larger  net  sum 
than  the  payments  he  must  make  to  the  workingmen, 
the   capitalists  and  the  landlonls.     The   difference   he 
keeps  for  himself  as  his  ])roiit.      If  there  is  a  deiicit 
h-  suffers  the  loss.     As  a  rule  the  entre])reneur,  before  he 
can  make  contracts,  must  have  a  certain  amount  of  cap- 
ital of  his  own  as  a  margin  against  loss.     Otherwise,  the 
cai)italists.  workingmen  and  landlords  must  have  an  ex- 
tra  remuneration    for  the   risk   they   take.     In  dealing 
with  a  capitalist  the  entrepreneur  does  not  borrow  ma- 
chines or  other  forms  of  capital  goods,  but  he  borrows 
a  certain  sum  ol'  money  or  purchasing  power  which  he 
c;in  convert   at  will   into  jn'oduetion  goods.     The  cap- 
italist  has   funds  or  pin-chasing   power  to  loan  to  the 
entrei)reneur.     This    purchasing     jjower    rej)resents     a 
c'laim   on   goods  in   general   which  are    for  sale  on  the 
market.     When  the  entrejjreneur  borrows  these  funds 
he  immediately  uses  them  to  claim   whatever  he  needs 
in  his  business.     It  was  not  the  money  he  wanted,  but 


34 


"(I 


MUNKV   AM)  IJAMvING 


the  buildiii,  %  Ihc  niacliincry,  niw  materials,  etc.  Money 
is  not  necrssary  in  production:  it  is  siiuj)iy  the  most  con- 
venient way  of  oettino'  control  of  the  tliin«4S  needed. 

22.  Capital. — The  conception  of  capital  is  one  of 
tlie  most  (h"(Hcult  and  confusing-  in  the  whole  science  of 
economics.  Just  as  in  the  case  of  wealth,  most  peofjle's 
idea  of  capital  is  a  sum  of  money.  Tntil  recently  most 
economic  writers  used  the  word  "cajjitar'  to  include  not 
oidy  money,  ])nt  everytiiinn-  wc  have  called  jjrodnction 
^■oods.  'Vhv  lundamental  idea  in  the  word  'cajjital,"  if 
it  be  analyzed  closely,  seems  to  be  this:  a  source  of  in- 
come. The  Kskimo  would  call  his  canoe  a  part  of 
his  capital  because  he  could  attribute  to  its  use  in  fishing 
a  certain  proportion  of  the  day's  catch.  This  pro})or- 
tion  might  be  measured  by  the  amouiu  .>'  fish  he  could 
have  obtained  without  the  use  of  the  canoe.  If  he  could 
catch  five  1'1'sh  without  the  canoe  and  ten  fish  with  it, 
the  canoe  might  be  regarded  as  the  source  of  the  income 
of  five  fish.  Capital,  therefore,  has  economic  im])or- 
tanee  only  as  a  soinve  of  income,  and  its  value  is  en« 
tii'cly  proportioiiate  to  that  income. 

When  men  reached  the  stage  of  calculating  income 
in  dollars'  woiih  instead  of  in  specific  commodities,  then 
caj)ital.  the  source  of  the  income  in  dollars'  worth,  be- 
gan to  be  regarded  as  a  sum  of  value  rather  than  as  a 
machine  or  building,  etc.  'J'herefore.  we  might  say  that 
cai)ital  is  an  abstract  conce])t  of  the  value  or  dollars' 
Morth  appertaining  to  the  source  of  an  income,  whether 
.such  source  is  tangil)lr  or  intan<>ible. 

The  merchanl  itgards  as  his  ca|)ital  his  stock  of  <roods, 
his  store  building,  and  fixtuns.  I)ecause  they  are  tlie 
souH'e  of  his  money  income.  If  he  ^' ere  asked  to  niake 
a  stattnient  as  to  his  capital,  be  would  sum  uj)  the 
\alues  of  bis  business  in  terms  of  <lollars. 


I 


EXCHANGE 


01 

(V  1 


I 


23.  Capifa1hatiou.—T\w  word   "cai)itali7.ation"   pre- 
sents a  (litlieult  e()neei)ti()n  unless  we  hold  in  mind  the 
root   meaning-  of   the   word   "eapital":     Capitalization 
represents    the    relation    hetween    ineonie    and    eajjital. 
whieh  may  ])e  made  elear  hy  an  illustration.      Sui)pose 
a  manut'aeturer  has  a  ])lant  whieh  yields  him  a  net  m- 
eome  beside  his  own  salary  and  a  reasona'  "r  profit  for 
undertakino-  the  business  of  say  >^1(),()00.      Sui)i)ose  this 
SI (),()()()  is  the  average  for  a  number  of  years,  whieli  ean 
])e  made  a  safe  basis  for   future  ealeulation.      If  this 
manufaeturer  were  asked  to  tix  a  i)riee  on  his  establish- 
ment, how  would  he  '^o  about  it  f     Perhaps  the  whole 
plant,  maehinery,  buildino-.  cte.,  did  not  eost  more  than 
><1  ().()()()  originally.  Init  tiiat  its  hi<>li  earnini>-  power  is 
(hie  to  the  ])ossession  of  a  ])atent  on  eertain  of  the  ma- 
chinery.    ()i)viously  he  wotdd  not  l)e  willin<i-  to  sell  the 
business    for   Si ().()()(),   or   even   $-2().()(M).     What   lie   is 
really  selling  is  tiie  ri^ht  to  an  ineome  of  $1().()()()  i)er 
year!     Tiie  priee  whieh  he  would  demand  for  his  busi- 
ness would  not  be  mueh  less  tlian  lie  would  have  to  pay 
to  obtain  the  .^10.000  ineome  from  anotlu-r  souree.      If 
the  oidy  ineome  he  eould  buy  with  the  i)roeee<ls  of  the 
sale  of  his  business  were  bonds  yielding-  .5  jnr  cent  per 
annum,  he  must  needs  reeeive  at  least  S-_>()(),()()()  in  order 
not  to  be  a  loser  in  the  transaetion.      He  eould  not  de- 
mand more  than  Ji<-2()().()()()  beeause  no  purchaser  would 
\)v  willinu-  to  buy  a  -^lO.OOO  ineome  at  a  priee  whieh 
would  purchase  a  $11,000  or  $l-.>,0()()  ineome  iu  the  se- 
curity market. 

If  the  owner  of  the  plant  thouo-ht  of  incorporating  a 
company  and  issuing  shares  oi'  stock,  he  would  be  con- 
i'ronted  by  the  same  i)roblem  oi'  placing  a  valuation  on 
the  business  in  order  to  projjcrly  eapiiaiize  the  cm  poia- 
tion.     In  this  case  if  the  income  were  practically  tixed 


^     -f 


sa 


^inVF.v  AM)  i{\\K[\(; 


at  $(MK)()  juul  there  was  a  wide  MKu-lut  lor  the  shares, 
't  IS  ikely  that  at  a  eapitahzali.,,,  of  x-Joomo  the  shares 
wou hi  sell  at  scM.ewhere  near  par.  That  is  to  sav,  the 
^rtal  sn.n  of  their  market  vah.e  wouhl  he  about  !J<20(V 

Oipitah/atlon,  therefore,  is  ^he  process  of  plaeino-  a 
vahmfonuponthesoureeofanineo.ne.  T  f  a  eorp.M-a- 
t'<'"  -s  <nereapitah.e,l.  the  vah.ation  whieh  has  heen 
Plaml  upon  ,ts  assets  or  the  s<,uree  of  its  earning  power 
Ijas  l.een  too  hi^h :  in  sueh  c.ses  the  shares  sell  be^.w  par 
11..S   n.ay   happen    not   only   beeause   the  net  earn  in  <,s 

■•'•c-  too  snum  as  eompa,e,l  wi-h  the  capitalization,  but 
'-crause   ol    the   uueertain    future,   or    beeause   the    de- 

;"••'""/'>•■  ^»'^"'  is  very  hmite<l.  Corporations  whieh 
jave  been  overcapitalize*!  a(  the  be^innin^  n.av  tin,l 
f'M  theovercap.tahzation  has  disappeared  in  the  course 
..  line  because  the  earnings  have  increasecl  in  amount 
|"'.l  staluhty.  Inth.  lan.uao.e  of  finance,  "the  wat^-r 
lias  heen  s(|ueezed  out  of  the  stock." 

This  subject  .,f  eapital  and  capitalfzation  belongs  to 
t  e  b,oajler  scence  of  finance,  but  so  intnnute  i.^  the 
idat.on  between  capital  and  eurrency  that  it  is  best  to 
get  a  clear  ulea  of  capital  at  the  outset.     Capital  in  its 
vanous    forms    like   consumption    .-oo.ls    mnst    chancre 
f|.'nds  u.  order  to  realize  the  o..,,atest  economies  in  .;,- 
<  -H-  .on  and  the  n.ost  efhcient  use  of  all  forn.s  of  pro- 
line .on    ^oods.     To    be   most   efi^ectivelv   utilized,   the 
and.  n,achnu  ry.    buildings,  n.aterials,   etc.,   nmst   f^nd 
the.r    way    into    eontrol    of    those    er.trepreneurs    who 

can  most  efliciently  organize  and  n.u.^i  them!     T,!;: 
very   ,,,  ru-.f,   ,,,,,,,,  ^j^.^,^   ^^^  ^.^^^^^^^,^    .^^  mysterious 

aiHl    <hi!innt     character,    so    tlf't     .....nv     .f     /      "'"""^ 

u  .1  •      "•'  "V"  •'   •"  ''''  oiiiser.      i  he  movement  of  can- 
ital  .s  so  mt.mately  related  to  n,one>   and  bankinu.  tJ^ 


IXlHANGE 


23 


one  cannot  l)e  nndcrstool  without  mastering  tlic  other. 

'2i.  Demand  for  capital  ^foods. — C'a[)ital  i^oods  arc 
|)i()(hicc'(l  hy  iiulnstry  for  tlie  market,  just  as  are  eon- 
siunption  «;'oo(l.s.  They  are  ])ro(luee(l  either  to  till  a 
(leinand  already  existiufj^.  as  when  the  nianul'aeturei-s 
work  on  contracts,  or  tiiey  are  made  in  anticipation  of 
a  market  when  they  are  ready  for  sale.  The  demand  i'ov 
capital  goods  comes  from  enti-epreneurs  who  wish  to  use 
tht'u  in  industry  foi-  the  production  of  more  ooods. 
Ik-fore  the  entrepreneur  can  take  ea])ital  <>-oods  off  tiie 
nia''ket  or  <>ive  orders  for  their  manufacture,  he  must 
havit  ])in"chasing  power.  This  jjurchasing  power  he 
mav  ac(iuire  in  a  variety  of  ways.  First,  lie  may  pos- 
sess  the  purchasing'  power  or  caj)ital  as  his  own  prop- 
erty; second,  lie  may  he  entrusted  ^v!th  the  purchasing 
power  or  capital  of  other  men  on  various  terms,  either 
for  a  tixeci  compensation  per  annum  or  for  a  definite 
share  in  the  |)rofits  of  the  husiness. 

Tliis  })urchasing  power  exists  in  the  form  of  money 
or  credit;  in  most  cases  it  is  hank  credit  in  the  form  of  a 
deposit,  against  which  checks  can  he  (h'awn  to  lU-.ke 
j)ayments.  It  has  its  origin  in  income  which  has  not 
heen  spent  for  consumption  goods  hut  which  has  l)een 
saveiL  Incomes  are  deri\  ed  originally  solely  from  pro- 
duction. Those  who  gain  a  personal  income  without 
producing  or  assisting  in  the  productive  pi-ocess  appro- 
priate the  incomes  ol'  others;  hut  originally  every  income 
'vas  the  product  oi'  someone's  productive  industry. 

25.  Money  incomes. — Under  modern  conditions  very 
few  of  the  producers  take  a  share  of  the  })roduct  as 
their  income.  They  prefer  to  convert  the  product  into 
])urchasing  ])ower,  that  is.  money  or  credit,  and  dis- 
ti'ihute  the  proceeds  as  money  income.  This  money  in- 
come, however,  is  simi)ly  re])resentative  of  the  products, 


Hi 


MDNIOV  AM)  RANKIXC 


n    1  ,s  o„,„,.,.t,l,k.  „,„  .,„,  ,, i,  ,,„.  ^..,i^,  ,„,  j|_^  _^^^_^._ 

K     .         iKivl,,,,..    ,!■    IIkm     i,„.„„K..,,,,i,,,,    |,,„|.„,    ,„ 

v»c    I  „s    |,u,vl,.-,s,„f;    |,„u,.r    ,-„ll,,,-    lha„    ,ss,-ri    tli.ir 

'■''■'." ;'  "■'■'"'"  """'">>i  of  f.N,s„„ii,ti,„i  j,,„„|s.  t||,.v 

liiNujjv  tile  furul  <iC  cqiit.il.  • 

■'''"■"""!"■  I"'-  tl'is  ..l«tinc„,.    (•,.„„,  c-onMn„|,ti„„  i, 

:''''''^''>;/'"''"'nKp,,,-,K,.,colal,st,,i,,inKiV,,,,.s,,c.,,, 
-«  _,n,K.„n„.ly,   l,„t   r...   ,l,c  p,„,,„.sc  of%e..-li„'„       - 

--'■'«■  ".i...c,,,uc..     Tl,is  conv>.,-.si„„  ,„•,„„,,,,,„  ,. 

'  ."""  I'™'"'"""  «■ ^  -tl.«-  thai,  .,:„s.„„,.ti„n 

«...l..s,.al,„v«t,„c.nt.     I  (•  it  „..,,.  „„1,„,.  , his  savin..- 

f,;;:;'V' ^ " -  p,-..!,,,,.,!.  .sa,.,M,„,L., 

"■ """"," '--I'"-I ■-■l™.n...l.a,„l'a,va;vait- 

n,«  :<  M,arl„.|  s„„„«Ik-,v  i„   ti,,  w„rl,l.      T!,,-   „n,sp,,.. 

,i.T:,nl''""''  "''  ''"'"""">"-  .\    ".,y  s,„all   p,- 

"••'>""  ;'l'."l"ll,isi,„,,„„l„i,„,vas,.|„ss !<.„,, I„. 

.-;.     yU,.  «,,.,,.,.  pa,,, ,,■  ansa., api,a,  is  ,;„.„ 

'»"   I.    ..Il,.a-.„l,vp,v„,,„..   |.„-i,„,,|,„,„|       .n,,,,,,,  ,,, 

;'.,;:,:;"■"'■ : r '•"'"'■ ■'■•■'I'i'^.'.^i-.siv,;,,, 

.''"^■■'V '■'"''''' '-i"ni„.,.„„vp,.,.„,,„.  „,„, 

«       s    i„.,,.|..,.,,„.p,,„|„.,,„„„,,„„|^^      r„si.,l„. a- 

::.:  -!"-:'^'">   l'"-li„ir„,.sl„„a,l„,-,|„.,„„,      .|.,,^ 

•-     i'.,i,„|,s     i,„y     i„„„K    „|     ,,     ,.,,|,„.„,_ 


I 


EXCHAXGi: 


25 


s\liic'li  llms  obtains  the  (•a])ital  and  expends  it  in  rails 
and  eciuipnunt.  Secondly,  the  saver  may  de])()sit  his 
savinj4's  in  a  eoinniereial  hank,  in  whieli  ease  the  eapita! 
finds  its  way  into  the  liands  of  eoniniereial  borrowers  of 
liie  hai\k  and  is  nsed  as  workin<>-  capital  to  l)ny  raw  ma- 
terials, to  pay  wa^es  and  to  carry  cnstomers'  aceonnts 
for  short  periods.  Thirdly,  the  saver  may  himself  hny 
stocks  and  bonds  from  a  bond  house  or  a  trust  company, 
and  thus  make  these  institutions  his  a<i'ent  for  invest- 
ment. Fourthly,  the  saver  may  hoard  actual  cash, 
which  simply  means  that  investment  is  postponed  for 
the  time  bein^'. 

•J7.  /^v//  invcshnciiL  An  Ihe  ordinary  use  of  the 
ti'rm  the  purchase  of  slocks  and  i.onds  in  the  market 
would  be  called  investment,  but  it  is  not,  however,  true 
investment.  In  this  case  the  saver  has  simply  shifted 
to  the  seller  of  the  bonds  the  responsibilty  for  the  real 
investment  of  the  capital,  i.  e..  the  responsibility  for 
convertinu'  it  into  pr-o(hicti<>n  uoods.  It  is  only  wlun 
till'  capital  is  in  the  hands  ol  tlii'  cntirprcncin-  that  an 
in\istmenl  can  take  ])laee.  Kntnpreneurs  are  con- 
stantly bidding-  i"or  the  use  and  conlrd  <»f  tliis  new 
capital  which  is  as  »'onstantly  aci'umu!atint>-.  'I'hc  en- 
triprtiKur  who  can  offer  the  best  raU'  of  interest  or 
the  lii-lusl  di\i(Unds  with  the  lust  secinity  has  the  ad- 
\anta,<4(.'  in  this  competitive  biddinii'. 

I'ndei-  our  modern  coi;ditions  of  industry  the  lai\ui' 
corporations  ari'  liktly  to  lu-  able  to  use  this  capital  to 
the  best  advantauc  and  hence  are  in  a  jiositinn  to  make 
tlic  must  attractive  ofl'ers  to  savers.  'I  lieit  fore,  we 
find  an  e\er  inereasiiiL;  jii  iceiitaue  <*!'  the  sax  in^s  ol  the 
communit\  flow  Inn'  in  that  direeli'in.  'I'his  is  to  the 
ixiblie  .idvantaiic,  in  so  far  as  the  corporation  is  able  to 


ti. 


unh/e 


nro< 


luct 


ion 


woods  to  which   the   capital   ^i\r. 


2(i 


.M()NJ:\    AM)   HANKING 


tliem  claim,  and  the  final  irsult  is  an  increased  amount 
ol'  product.  J'or  this  reason,  any  syst'in  whicii  facili- 
tates the  tlo,v  of  capital  from  the  savers  into  the  hands 
of  the  most  elHeient  entrejjreneurs  is  a  distinct  economic 
gain.  All  thr  highly  specialized  financial  institnlions 
perform  this  economic  service,  and  their  productivity, 
indirect  tluninh  it  he.  is  to  he  r>easured  hy  the  increased 
elficiency  oT  th.-  eaj)iial  which  they  have  diverted  into 
the  most  produc'ci\c  field.  The  stock  exchanges,  the 
financial  aiid  commercial  hanks,  trust  companies,  under- 
writiiin;  syndicates  and  all  the  machinery  of  jii^h  finance 
are  ccoik  niically  hcneficial  to  the  country  in  the  degree 
that  they  perform  this  function. 

Furthermore,  this  high  development  and  delicate  ad- 
justment of  tinancial  institutions  is  only  possible  when 
the  currency  of  the  country  is  of  the  soundest  and  most 
sell  lit  itic  ch;iracter.      Kvcry  defect   in  the  currency  sys- 
tem makes  it  more  .iiUicult  or  hazardous  for  such' insti- 
tutions to  do  !)tisiness  and  is  a  handica|),  the  etrect  of 
which  can  he  measured  hy  Ihe  diminished  eHiciency  of 
all  the  industries  of  the  country.     The  man  who  says 
that  cnrreiiey  and  hanking  (juestions  arc  no  concern  of 
his  would  prohahly  he  surpriNcd  to  learn  that  iiis  wages 
are  miimIK  r«.r  tlu   prices  ol'  the  no.xis  h<'  buys  .•,ie  higher 
(»n  accomit   of  some  weakness     i-  defect    in   Ihe  system 
uhici.  tin    currency  ref.u-m<rs  are  strixing  to  menii,  yel; 
such  is  the  c;'se.      Causes  which  ;M-e  tli(    most   potent"  in 
pr..diiein-  effects  are  fre((uenlly  the  most  obscure  and 
unappic.iated. 


X 


I 


CIIArTER  III 


VALUE 


28.  Value  a  rcfii.stcr  of  economic  forces.— ^'mve  in 
our  mocitM-n  civili/atiou   every  man  satisfies  his  v.ants 
tlir()u<ih  exehaii<^e  of  what  lie  pro(hices  or  helps  to  pro- 
duce,  for  wliit  he  consumes,  every  man  is  perforce  a 
(kakr  in  values.      Specific  commodities  are  reduced  to 
terms  of  ahstract  value,  and  are  dealt  in  as  such.     The 
workman  sells  his  lahor,  say.  at  ^\0()  a  month,  and  re- 
ceives an  income  of  .$100  worth  of  <roods  and  services 
ol"  liis  own  choosinji'  from  th'  market.     His  economic 
welfare  is  entirely  a  matter  of  the  relation  hetween  the 
effort  rcijuired  to  earn  the  wane,  and  the  amount  of 
utilities  whi'h  can  he  ohtained  with  that  wa^^c.      Either 
a  fall  in  the  rate  of  wa<ies  or  an  increase  in  the  prices 
ol'  goods  has  the  same  effect  in  aUerin<r  the  relation  to 
the    disadvantage    of    the     wage     earner.      Kconomic 
changes  therefore  always  appear  as  changes  in  values. 
\'alue  is  simplv  a  register  or  index  of  economic  I'orces. 
Tile  reward  of  the  entrepreneur    for  liis  productive 
(  IVorls  comes  in  the  shape  of  profits.      I'rolit  is  simply 
the  diirereiiee  hetween  the  cost  of  the  proihict  and  the 
selling  price.     Any  change  of  values  which  alters  the 
cost  or  the  selling  prices  has  its  eU'ect  on  profits,  either 
diminishing  or  increasing  them.      We  may  call   profits 
the  mains])ring  of  industry,   hecause  they   are   the  mo- 
ti\e  which  induces  Hie  entrepn  iieur  to  organi/c  industry 
h\   horrow  ing  capi'al.  em|)loyiug  lahor  aiul  renting  land. 


\  N   lien    I  ill"    LX  p'l'lil  t  II  M  I    III      |(i  <  >in  -,    i->    ^iiiti  1 1.    1 1 IV     V  1 11  1  <  |..  » 

>»7 


2H 


MONKV  AM)  BANKING 


neur  J.as  little  indnccncnt  to  encourao,-  any  new  enter 

=:9^stt;;l,j:~':;;:;r:; 
;;;  ,;;;;:i:;rsss,;;;;2;»-::i 

•  .s  likely  t„  he  „  ,,,„„„  „,      .^.,,,  ,,,;,  ^^.,.       ;., 

>  "son,-...  ,,t,,,„.,l  t.,  tiK.  ,,,,,,,«t,  ,,,:.:  1.,,,.  in  , 
''•  '■'■■'.'"I  ^"  '  -  l"Kl.-l  " a,..s.     .Altcnu,!.  |K.n„,l.  „7' 

^.•iiii  conditions  of  \alne. 

The   tact   tl.at   enr.vney  and   l.ankhur   have   -i  most 

?™''''''-'"-"™t. Ik.  ,•,,,,,,.. ',,„,.»  .r,,    . 

'"'  '""'■'■  "';:-^-  I"'  !-"■  I'""-I1-  /•,„■  <.ha„„.c,  i„  J.,  e  .  i 
ImMrii-ssn.Mililii.iis.  W<"ii.il 

'>!'-         ''V ■■''"•■  ""1'-  l«."l<.   IV.r  ™„„p|,,  ,„,  |,e 
'.'","""■'' "'''■^' '■>  • l''-™"i(l,s.„„H|,i,V,,,'    ,' 

'*;/''"'■■  7  '"'■' .".•alm.sl,,l„r,vl„,,l.    "l'l„.v       .. 

'■'    '  •    "■•"'-   »"^l't   1-  .x,..-,,.,.,!  |,v  ,,vi„..     It; 

""'•"  "•>' '^  "'■  «i...<.  This-  >,,-,„„„,: 

::":^":7", >■ v-l.ik ,,, ,,;''. 

11   IS  ncccssaiv.    to  liavc  n  ,.()nnn<.,.  ,.,...  <       "  • 

j^  •  ■■•'>'".>.<.,  nu-as,nvnrd<„on,Mia- 

--   -wn.i.nis  ai    U-ashin.tnn  are  k,.p,   ..,,,ain   vard- 


VALUE 


o( 


sticks,  wei^iits  and  vessels  wliieli  are  the  standard  units 
of  length,  wt  ight  and  capaeity. 

W.  Definition  of  the  dolUir, — Jnst  as  Congress  has 
declared  that  a  certain  length  shall  he  a  yard,  so  it  has 
also  declared  that  the  unit  of  ^■ahle  shall  he  a  tlollar,  of 
'I'^.'l'l  grains  of  pure  gold.  The  only  definition  for  a 
dollar  is  that  it  is  '>'.\:1'1  grains  ol'  gold.  All  other  so- 
called  dollars  are  such  hecause  they  are  convertihle  into 
standard  gold  dollars.  In  this  convertihility  lies  their 
value.  'I'hey  are  not  standard  dollars,  hut  representa- 
tive dollars.  l*rice  is  sinii)ly  value  ex])ressed  in  terms 
of  dollars.  If  T  say  this  hook  is  Morth  <$.5,  I  mean  that  it 
is  exchangeahle  for  live  times  2.3.22  grains  of  gold,  or 
its  e(iuivalent. 

If  we  speak  of  a  ])i  rson  as  heing  worth  $.")(). 000, 
therd'ore,  we  mean  that  he  has  a  legal  title  to 
|)roi)ei'ty  consisting  of  various  forms  ol'  wealth  luuing 
a  total  exchange  value  of  fifty  thousand  times  the  ex- 
change value  of  our  unit  of  gold,  oi-  its  e(]uivalent.  In 
order  to  I'cali/e  this  exchangeahility.  howcvei-.  it  is  first 
necessary  to  con\ei't  th.e  wealth  into  money,  which  is 
oi-dinaril\-  very  dillieult  to  do  at  the  market  price,  and 
then  (Mitnerl  the  money  into  goods  desired,  which  is  \v\ 
easy  to  do. 

.'U.  I'jiVchan^cahUitii  the  sole  iitiliti/  of  nioiiei/.  The 
d(  sirahility  of  money  as  a  form  of  properly  is  due  solely 
to  its  ready  exchangeahility:  for  any  ollu c  pin'pose  it 
is  inferior,  producing  no  income,  as  do  factories, 
stocks,  honds,  etc.,  and  rc<|uiring  extra  |)i"eca(itions 
against  theft.  Its  iiianal>ilit\-  is  simpK  another  form  of 
its  e\(  Iiangcahility.  The  honowcr  purchases  the  in- 
eoinc-yielding  wealth  and  promises  to  divide  the  income 


">>  i  1 11    1  in      ii  i  n  n  I 


'V2.   (told    flat   (III   ideal   staiidurd.      Gold    is   verv    far 


,'30 


-MOMIV  AM)  H.WKINCJ 


from  bc.n^r  an  ideal  stan.lanl  of  value.     Suppose  the 
yankst.ek  had  the  ohjeetior.al.le  habit  of  shrirlkin'^  an,! 
expa.Hhn .-  hein.-  thirty  inches  one  year  and  fortv  h.ehes 
the  next       ll,e  merchant  contracting  to  take  one  thou- 
sand yards  of  cloth  a  year  hence  wouhl  run  the  risk  of 
losing,  on   tlie  deal  merely  on   the   Huctuations  of  the 
yard-st.ck       The   <loIlar   is   just   such   a   n.easure.      I'l 
value  IS  chano-n,.  constantly.     This  fact  is  conceals 
rom  the  ..nhnary  ohserver.  who  attributes  all  fluct-i- 
tHHjs  m  prices  to  commodities  rather  than  to  the  dollar 

Price   states   the   ratio   between   the   xalue   of  '>;j  .>o 
gran.s  of  ^chi  a.id  the  value  of  the  thin«-  to  be  measural" 
Ihc  -atu,  C.U1  be  altered  by  the  chanoes  in  the  value  of 
«ohl  as  well  as  by  changes  ,n  the  value  <.f  o-oods      ]f 
wheat  falls  t(,  .-,0  eents  per  bushel  it  mav  be  because  of 
an  alteration  in  the  relation  of  demand  to  supplv  in  ref- 
erence to  wheat,  or  it  may  be  because  of  a  dian^e  in 
the  value  o    money.     If  the  price  of  wheat  alone  has 
H.an^r,d.  while  the  prices  of  all  other  commodities  re- 
"'ain   stable,  the  conclusion   must  be  that  the  changes 
were  due  to  causes  affectin^r  wheat  alone.      Ifowerer 
It  all  prices  have  shown  a  tendency  to  move  in  the  same 
«  n-ecfon,  especially  when  it  is  reasonablv  certain  that 
there  have  been  no  changes  affeetin^r  the  relation  of  sup- 
ply and  demand  of  these  ^.oods.  the  explanation  of  the 
'••'"  '"  j)nces  must  be  sou^d.t  i„  „,onev  itself 

tnbute,!  the  general  fall  of  pnees  to  an  increase  in  the 
value  o«  o-„ld,  the  sole  .slandar<l  of  value.  Their 
'•^■"K-dy.  b.metallism.  or  a  double  standard  of  both  .-oM 

^»"d  s.ver.  woul.l  have  raised  prices,  but   it  wouhl  have 

caused    such    a    rb^tni-Ii..,./.-.    ..<•    .,..:.  .  

-.!i^^    ...     [/..v^i    ,11111    rji(iii.    t»oiJi 


ose  the 
11?^  and 
inches 
-  thou- 
risk  of 
of  the 
-'.  Its 
icealed 
iiet':a- 


I 


VALUE 


31 


temporarily  and  ])ernianently,  that  many  tliink  the  cure 
would  have  heen  ten  times  worse  than  the  disease.  A 
diseussion  of  this  principle,  however,  belongs  to  a  later 
eha])ter  on  the  Standard  of  Deferred  Payments. 

The  idea  that  the  value  of  the  dollar  is  a  constantly 
fluctuating  thing  is  so  novel  to  most  peo])le  that  it  is 
worth  while  making  it  very  clear.  In  order  to  do  so  it 
is  |)erhaps  advisable  first  to  consider  the  general  prin- 
cii)les  which  govern  the  value  of  anything,  whether  it 
be  commodities  or  money. 

'.y.i.  DctcrwiiKition  of  value.  -How  are  \alues  de- 
termined and  what  forces  govern  the  fluctuations 
thereof:'  The  statement  of  the  older  economists  is: 
Value  is  deternuned  I)y  Cost  of  Production.  A  thing  is 
worth  the  cost  to  ])ro(luee  it.  The  insufficiency  of  this 
explanation  is  ap])arent  when  we  consider  the  great 
number  of  things  whose  value  is  widely  different  from 
or  has  no  coimection  with  the  cost  of  production;  land, 
for  example,  which  has  no  cost  of  jjroduction,  or  build- 
in<)s  of  unsuccessful  enter])rises  which  may  sell  for  one- 
tenth  of  their  cost. 

.'U.  Viil'itfi  tJiior//  of  V(tluc. —  A  modern  theory  holds 
that  value  is  determined  by  "utility."  rsefuluess  or 
desirability  rather  than  cost  is  the  (]uality  which  gives 
a  thing  power  to  exchangi'  for  other  things,  rseful- 
uess. however,  is  a  matter  of  personal  estimate  and  varies 
infinitelv  with  different  individuals.  Since  "value"  is 
expressid  l)y  the  market  i)rice.  and  there  cm  l)e  but 
one  market  ])rice  for  the  same  thing  in  ofie  community 
under  the  same  cireumst an.'-'i"",  the  utility  uicorists  were 
forced  to  lind  a  utility  which  was  usefulness  to  the 
whole  eouiinimity  or  a  sort  of  social  utility.  This  they 
named  "marguiai   ulihlv,     and  gave  the  world  an  ex- 


32 


MOM-.V   AM)  HANKINd 


pression  uhidi  has  Ikvi.  r„,ni,l  cxtrenidv  useful.  The 
tern,  is  r..i,iin-  int..  e  nnniou  u«e  and  is  therefore  worth 
UM(lerstan(Hn«>-. 

:J.5.  Maroi>,a/  utilitn.-^h,  a  small  eitx-  then'  niioht  he 
one  i,ers<.,i  uh„  u-oul,I  be  willino-  and  ahle  to  -ive  anv 
amount  up  to  Sio.cm  for  an  automobile:  the.x^  n.ioht 
1.0  another  whose  linu-t  is  .^!)..-,0():  and  another  at  .^1)  000 
and  soon.     As  ue  o,,  ,l,.wn.  the  number  of  j,ossible 
p.irehasers  mereases  so  that  there  nnohl  be  several  lum- 
<lre<l  at  a  j.nee  between  .^r,00  and  .^Kooo.     'phis  jH.ten 
t'al  demand  for  automobiles  niioht  be  represented  by 
the  lollowmo'  diam-ani:  *^ 


<:iO,000— r — ■ 

] 

S.OOO  — 
6,000  — 
4,000  — 

A 

«  1 

C     i 

D 

3,000  — 

2.000  — 

1,000  — 

0  — 

■E 

The 

hei 

-ht 

of 

the    ( 

'ojnnm 

G 


H 


o.hnnns  represents  the  monev 
<|.nvalent  ot  the  denuunl  for  automobiles,  an.l  th'e 
I'rea<  th  of  the  eol.nnns  represents  the  number  of  auto- 
n.obdes  wh.eh  wouM  be  bouoht  at  the  (lifferent  priees 
Suppc^e  un.k.-  these  eonditions  three  ears  were  bmu^ht 
;>  that  e.ty  lor  sale.  The  n.an  A  would  pav  .^10  000 
'•:;'''^f'-'-''<'-'-tlK.l..ows  there  ar^lnj  He 

sol.l.  so  he  ret  uses  to  pay  as  mueh  as  he  would  if  there 
-re  only  one  for  sale.     To  dispose  of  the  three  auto- 

'•  oJ-.  tlH.  de.der  nurst  not  .lenwmd  n.ore  than  -l^lMmo ■ 

;'•••''   i--  ;•   H.  and  (-  will  supply  tlK^^^^^^^^^^^ 

tin  s  estabhsh  the  ,narket  priee  in  that  eitv.      The  auto- 

JH.'f..  OS  may  not  have  eost  n.ore  than  .^1.000  t,,  produee 

!;r'"''':^\-'-''''--'--.l.tiuHxin.te,,       ' 
1  lie   xuM'i'  IV  ,l,.f. ...........    II..  '^  I'liL*.. 

is   bv^l    '     .;;--=;;  =  =;=^-  'v   ''-^     '"ar^mai  utihtv."  that 

is.l.>  ll-eutd,t;,.|  the.automobih.pM,,|iasedbv"c'.wh. 


lio 


i 


\ALri:  iw 

is  callcil  the  iiiai-<^inal  piii'cliasrr.  Mar,uit)  means  "cd^c"' 
and  C"  is  the  piu'ehaser  who  is  on  the  <'(lu,-e  of  the  market, 
ir  there  had  l)i'en  oidy  t\\()  antomohiles.  he  wonhl  not 
ha\e  heen  sn])i)hed:  il'  there  had  heen  t'onr  instead  of 
three  for  sale,  the  priee  wonhl  liave  had  to  he  reduced 
lo  .ss. .)()()  and  tlien  1)  wonhl  have  heen  the  purchaser  on 
the  margin.  'I'his  example  is  of  course  hii^hly  the- 
oretical and  would  prohahly  ne\er  liai)])eii  in  this  way 
in  I'cal  life,  yet  the  pi'inci|)le  is  true  and  \\orks  out  \\  itli 
^■I•eater  precision,  as  there  are  a  yrcatei-  nnmhci-  of 
huyci-s  and  sellei's.  and  as  the  know  Icdyc  of  each  othei's" 
rial  desires  increases. 

.'J(!.  Miiri^iiud  iitilil//  to  I  lie  iiuliiidiial. —  In  the  illus- 
tration we  ha\e  assumed  that  each  l)nyer  desires  hut  one 
unit  of  the  article  foi-  sale.  With  many  classes 
of  u'oods,  each  huyer  may  desire  niorc  tlian  one  unit, 
{•ii>ars  for  instance.  Some  wealthy  men  miiiht  <4i\c  a 
dollar  if  they  had  to  for  one  ci^ar  a  day  l)ut  they  would 
not  yive  so  much  for  a  second.  l-"rom  this  t'act  we 
de!M\e  the  ""law  of  satiety,"  tiiat  v\L'vy  unit  of  a  com- 
modity consumed  yields  successively  less  satisfaction 
and  has  less  utility  to  the  consumer  than  its  predeces- 
soi'.  'I'he  demand  of  any  one  consun\ei'  for  units  of 
a  ^ixon  commodity  w  ithin  a  i>iven  period  may  i/c  I'cpre- 
sented  hv  the  follow  inj'-  diauram: 


I   ;^ 


.*l.nn_ 

.•)0 

H-^ 

.(XI                                       1        1— 1 

1, 

-'.     ;},    4,     5,    6th 

•ifTiir 

To  make  a  chart  showinn"  the  demand   t'or  cii^ars,  it 

^V()!!!d     he     ! !',  ('('SS.!  rV     !•>    CO.'Mh!!!'.'    !  h.' •    ■■h:!!'!'-     !''-'n!"'.'Se!!t !!!  "' 

the  demand  of  each  coiisumei".      Snpj)ose   for  the  sake 
of  sinij)le  illustration  tilers  were  one  huiuhed  consumers 


01 


.M()M;v   AM)   i;\\Ki\(; 


"''  ^''-'""^  '"  '■'"•  '"•"•l^<t-  ^''^'li  ^vit!.  a  pntnitial  .Icn.and 
npivscnlc.I  l.y  llir  tnn.ncino-  diaura.n,  a  chart  slu.u  ,„.r 
the  «4'ciitral  (kniaiid  would  \k-  Ihiis: 


$1.00       ' 
.75  —  i 
.50  — 
.25  — 
.00  — 


1-- 


Ist.       -Jnd.      :!>(l.       Ill,,       .Hti,       -111  .MIC  liun.liv.l. 

Supimsc  ilu.  , Makers  ,.r  ll.is  particular  (|ual,lv  ..r  n..ar 
'•""'<l  'I'-'l^c'  a  fair  profit  l,v  scllino  then,  at  "j:, 
"■n!s.  They  ^^uuUl  pnnhicc  live  hmi(hcd  hccaiisc  thcv 
<-oul.l  find  purchasers  for  that  .luah'tv  at  -J.',  cents  cacll 
llKy  could  ,H,t  Mvt  nioiv  hcrause  there  can  he  l.nt  „ue 
Pnce  in  the  market,  and  the  huvers  ass.nnini.'  that  thev 
nnderstand  the  situation,  will  pay  no  more  than  neces- 
sary. It  the  niannra.-turers  make  more  then  five  hun- 
'''■;'<1  c-.i^ars  and  attempt  lo  sell  sav  fiv..  hundred  an.l 
''<ty.  tiny  u.Mild  foive  the  pricr  I.el.m  iV,  rents  and  de- 
stroy their  profit. 

.'{7.    ILnnidlinliini  of  Ihc  ha,  t/unrhs.      It  is  easy  to 
'".derstand   nou    nhv   the   value  of  anvlhinu-  that  "can 

"■easily  pn.juced  coincides  with  the  cost  of  production. 
If  the  value  is  much  ahove  the  cost  there  will  he  an  ah- 
;"'''"'•■''    I"'"''*    '■"    ''f-    l"'Hlucers  will    hv  attracted    f.   the 

"isiness.  the  supply  will  1,,.  increascl,  an,l  the  price 
iM-ono-ht  <lown  hy  the  coinp(titi<m  of  [W~  sellers  until 
't  ;-""u-i<les  with  thece,st.  Converselv.  if  the  valu,'  is 
''"''7  ^•"^*-  "'^'  ^"'PPIV  will  he  rc.luccl  on  account  of 
i;'-"<l"«vrs  kavino-  the  husiii,  s  and  the  price  will  rise  to 
'I'ecost.  I  r  file  supply  of  the  lhnn,,sfi.x.d.  the  market 
I"'";<'  .'"'.1  cost  of  produc-tion  mav  June  no  relation  to 
each  otiiei" 


V 


I 


I 


ClIAl'TKli  IV 

lAOIATION   Ol     mi:    Ml.DIlM   OI"   KXCIIAN(iK 

:W.  Pnwlihc  ideas  of  value— 1\\  the  pm-ediii^r 
chapter  \vc  liave  (lesfril)r(l  liow  llie  iircessity  lor  llic  cx- 
clmiiyv  ()!'  <i«)<)ils  was  tii'sl  felt.  \Am<x  Ix-'I'ore  the  ri^-hts 
of  iJiivate  property  were  ree()<^iiize(l  within  the  tribe, 
theri  was  exelianoino'  of  articles,  usually  luxuries,  or 
ornanieuts  oi'  u,()0(ls  of  an  oriuuneiital  character  between 
the  tribes:  first  in  the  nature  of  gifts,  later  oTowin<r  into 
Hie  regular  systematic  exchan<ie.  This  trade  was  direct 
h.ii-ier.  no  niediuni  of  exehanii'e  being  used. 

Later  when  ])ri\ate  property  rights  became  more 
(Ictinitely  recogni/ed  within  the  tribe,  intra-tribal  ex- 
change sprang  up.  The  first  articles  of  this  tratbc  were 
the  injported  goods,  to  which  a  more  definite  value  was 
;iserit)eil.  inlliienced  by  the  limitations  in  the  supply. 
It  was  most  natm-al  that  these  articles  with  their  dcti- 
iiile  value  should  become  the  measm-e  of  the  exchange 
value  for  the  goods  domestically  exchanged,  and  thus  wc 
have  the  bi-glnnings  of  the  idea  of  a  standard  of  value, 
still  very  crude  and  ill-dctined  but  serving  the  pur- 
pose. 

l'"iu-therniore  these  Im|)ortcd  goods  were  as  a  I'ide 
highlv  desired  by  everyone,  and  were,  theiefore.  much 
-  asirr  \()  d;sl)()-^e  of  in  exchange  for  other  things  than 
(loimslic  commodities.  This  gave  to  them  an  additional 
utilitv  ([uitc  aside  from  their  usefulness  or  then-  ability 
to  satisfy  the  wants  of  their  jjossessors.  We  call  this 
utilitv.  'exchange  utility." 


fjn 


MONKV   ANf)   15.\NKI\(; 


^  '{i».   OrnaiiKnhil  .sin, Its  carl//  Nsrd  a.s  /none//.      Article's 
'ii'st    iisid   ;,s   .n.UKv    in   .Mny   (|..fii,i((    way  of   vvliicli   u  c 
Ikivc     kiiowlednc     \\tr<.     oi'iiniiicntal     stniics.      An     ex- 
Iravaoant  love  L.t  (.ni;ini(  nt  is  one  of  tlir  ni..st  nnivcrsal 
diaractrristics  of  savnovs.      Tiuy  arc  lik,  |v  to  cstin.ate 
•"■'laufnls  at  a  nmcli  Iiiulier  value  tlian  tlic  more  neces- 
sary   coniinoditlcs.      Tlic    ntility    nf    these    ornanienia! 
stones  or  slujls  was  so  constant   and  nnivcrsai   that   tiie 
'''■■'"'•"(i   ''"i-  them  uas  likely  to  he  hiohiv  stahk.      Th.c 
savane    was   nnick    to   realize    that    if   he"  conid    possess 
linnsclr  n\-  a  supply  of  these  articks  he  had  at  his  co.n- 
llKUid  the  power  to  ^rct  anythino-  else  of  which  h.-  nii-dit 
'"■  "i  need.      JIcn<-c  these  stones  took  on  an  additional 
'""^■ti""   ri'  a   store  of  value,   easily   exchano'eahle    for 
other  \;dues. 

U).  Three  fiiiiclions  of  prirn'ilhc   ,n  one  if. —Thus   in 
the  earliest   for;,i  oi"  n.on.  y  we  have  the  three  functions 
well  (Icvclope.k  the   function  of   Kxchano-eahilitv.  of  a 
.Measnrr  of  Y-Uv,,  a:    1  .,r  a  Sfuv  „('  Value.      In"  all  the 
more  primitive  nations  this    function  of  store  of  value 
was   moie    imp..rtant    than    in    modern    tiuics.     Jewish 
M-omen  of  ih.    Oid  'IVstament  carrie<l  al»oui    their  per- 
son tiieir  dowries  m  the  foni)  of  ornaments  and  jewels. 
'Die  East  In.lians  of  to-day  eoi.vert  their  surplus'wealtii 
'iito  sdver  and  carry  it  ahout  with  them,  not  so  much 
f  '-om  an  cxtrava-ant  hn  e  of  ornament  as  from  the  more 
practical  motive  of  havino-  always  at  han.l  the  means  of 
"i.tamin-  the  necessary  articles  of  livelihood.      As  we 
shall  see  latri   this  -ustom  is  a  vcr.N-  forniidahle  obstacle 
"•  th"  p.atl.  of  (conojnic  development. 

H.  U'a.»'pnm.  TIa  Am-rican  I-idiaiis  uere  in  this 
stanv  of  ciiltunii  devek)pment  when  the  American  set- 
tlers tiisl  .•a,ue  hi  contact  with  them.  'I'hcv  had  elimi- 
nated all  fornix  of  ornamenlal  money  except  uampnm, 


;vni,r'ri()N  or  Tin:  mkdux!  ok  I'xcii  wci:    :?T 


4 

7 


9 

-4 


I 


vliidi    n.iiMsUM    ni'   stnii.us   of    !H■a(l^    rut    fn.m    slirlls. 
Tlicsr   lu'iiilN  wire  ol'  t^\()  colors,   wliih    and   l)lack,   tlu" 
l.lark  Leiii--  worth  douhlc  thr  white.      In  trade  with  the 
lii,li;.iis  tlie  sittli-rs  I'outid  it  i-.)ii\  eiiiiiit  to  use  waiiipuiii. 
;iii(l   it   therefore  aecjuired   a   \ery   dcliiiite  vahie  in   the 
,.n!onies.     The  colonies  hickin.u'  a  supply   of  ^iohl  an;l 
silver  coins  were  c()mi)elled  to  make  payments  amon.i-- 
tluuiselves  in  wampum,  and  it  was  at  one  time  receiv- 
ahlr  iis  leual  tender  for  payment  of  dehts  to  the  amount 
,,f    ten     pounds    sterlin.u'.    or    ahout    ^rA).      The    disad- 
\anta<^es  of  this   form  of  money  were  manifest  when 
Miuie  clever  hut  more  nnscrupidous  Kuroptans  invented 
a  method  (.f  dyeinn'  the  white  l)cads  hlack  and  douhlino- 
their  value  hy  the  operation.      So  difficult  ^vas  it  to  de- 
t(et    this   primitive   counterfeitinu"  that   wampum    sooi\ 
•ame  into  discredit.  :md  at  len<;th  was  discarded. 

V2.  lic'ivcr  .^l/nis.'  Tlu-  next  form  of  mechum  of  ex- 
ehann'e  to  he  adopted  foi-  tra(hni>-  with  the  Indians  had 
tjie  nie'-it  of  hein^  imix-ssihle  to  counterfeit.  'I'he  steady 
demand  foi'  lieaver  skins  for  manufai  urinu'  into  iiats 
in  l-jiuland  ua\  e  them  a  n  ery  stahle  value  amono'  the  col- 
onists, and  they  earl\'  aeiiuii'cd  the  .(uality  (d"  exchan^^e- 
ahility  in  addition  to  their  ordinary  utih'y.  When  a 
ti'ihe' passed  from  the  hunting'  to  the  pastoral  sta,u'e 
of  cultural  development,  it  was  natural  ll.at  they  sliould 
adopt  a  coiumodity  for  money  v  hich  existed  in  ureater 
and  more  constani  sup])!y  th.an  the  products  iA'  the  chase. 
Thus  we  lind  amo'i^'  the  ancii'nt  Ilehnws  and  Ai'al»s 
that  cattle  were  used  tor  the  jiurpo-f.  However,  it  is 
d(.uniful  whethe'-  tl.ey  attained  any  ,ureat  circulation  as 
a  mediiun  of  exchanm':  it  is  iiiorc  lik-  ly  that  they  i)cr- 

irii.ed   the   function  (>['  a  measure  of   value.      In   tlie 


on 


hook  of  Cenesis  we  constantly  read  staie-uctit'^  of  tiie 
v.-ealtli  of  indi\iduals  as  measured  in  the  si/e  of  tlieir 


'.iy, 


-^"'m:v  AM)  irwK.x,; 


.     ,      '■  '""*  •■""'  lis  |'<nslial)ilitv 


,•       -'^  '"^   i;iic(r(;!!iifv  (.}•  tlic  siiDi.N-       r 

'  '"' lie  More    t n-    f  .1  .*       ••    11 
41  .  '■'"'Ud  w  .Is  also  a<!'iMis!   f  1/...,       <k 


iiiakc   list    ,,/• 
'/'""■''  ""'■«'   pnuiitiN,. 

.'I  I  hi 

.'I  I  III 

ila<- 

'■'■'■•'  '"  "liix.rt  sue!,  ,,i,  r- 

ni(  tallic 
■  ini|)(ii!s 


1 


« ^- '«■^'>':'^;;:::;:•:;;•^::;:r■^^ 


i:\()i.r'i'i()N  OF  I'Hi:  mkdum  uf  fxciia.n(.k    'm 

l((l)acc-()  {•iii'iciK y  ill  \"ir<4iiiia  reveals  a  <^reat  many  of" 
i  the  priMeii)le.s  iiiidei-lyiiio-  the  seienee  oi'  money.  The 
J  story  is  very  well  told  l)y  Mr.  Iloraee  White  ii,  his  i)ook. 
'i    "Moiuy  and  lianking": 

In  Hity  at)  act  was  passed  forhiildiii^-  tlic  iiiakiii;;-  of  loiitracts 
|)ay'il)le   in    inomy.   tlnis   vlrtnallv    niaklnii,'   ti)i)acc()    the   soir   cur 
iiiicy. 

'i  he  Act  of  KJl'i  wa^  repealed  in  1().")().  Init   nearlv  all  the  trad 
In;;'    in    tile    j)i'()\ince   conlii.  i.d    Id    hi-    done    with    tnhacco    a--    the 
nil  ilinin  of  exchange. 

In  \()':iS  the  price  of  tohacco  in  silver  had  hei  ii  H-.  (id  per 
pDUnil  in  \'ir;;'inia.  Tlie  cidtixation  !n<  i-(  a-((i  sn  rapidiv  that 
in  1():>1  the  price  had  t'alli  ii  Id  (id.  In  lirdrr  t..  rai-e  the  price. 
>ti  p^  Were  taken  to  r'^lrict  tiie  ainonni  i;rn\\n  and  In  inij)i'<)\(' 
the  (luality.  The  rl;;'ht  to  cidlivate  tohacco  \\a>  riNti'icted  to 
]  M)()  jilaid-  pi  r  poll.  Carpentir-  and  oHnr  niech.inic-  uere  not 
J  aiio\\ed  to  plant  toh.icco  "or  do  ;in\'  (itiier  «oik  in  the  ^ronnd." 
;  'I'hesi'  iiiea-llle--  Ucre  i  neti'i  <'t  i  \  (  .  'I'hc  jiric;  continued  to  t'.tll. 
In  l(i;5!)  it  was  oid\  ;>d.  It  uas  nou  en.icled  tiiat  halt'  of  the 
H'ood  ;uid  all  of  th(  had  should  !)•■  de>trc\ed.  .and  Ih.al  there- 
(tt.r  II  creditor^  -hould  accept  M'  Hi.  f(U-  100;  Ih.it  the  crop 
of   KiKi  -hoidd   not   he  ^oiii   for  ir-.>  th.in    I'^d..   nor  that    in    Kill 


lor    le>s    til 


an  !,J>.    per  pound,   under   jun.dty   of  fortViiine  of  tl 


uholeci'op.  'I'hi>  la\v  w.i>  inetitctiial,  a--  the  pri  \  iou^  om  ^  had 
heeii,  hut  it  cau^((l  much  injustice  Iti'tueen  i!''hlor^  .and  ci'((iil(U'> 
hy  ImpauMii^'  the  ohhi^ation  of  i\i~tuiij;-  coiit  i-.act^.  In  Hi!.")  to- 
hacco was  worth  oiil\    1  '    .d    ,ind  in    l<i").")  (jnl\    Id.  per  pound. 

Tlie^e  1  vents  tea(  h  U--  t  h.il  a  coninnidit  \  w  hicli  is  liahle  to  ore.tf 
and  iiddiii  ch.in;j,i>  ot  ~uppi\  !■>  not  ,a  <livn-ahle  <uh  Io  he  u--cd 
a-.  ii!one\ . 

in  l!ie  year  !()()(!  ;i  I  I'r.lt  »  u  ■  ,eo;,tiated  and  ralili^d  hitueeli 
the  coloiues  of  Mai  \  Land.  \  u''  ua.  .and  i  '.irohn.i,  to  ^Inp  iilart- 
ni^'  toii.icco  for  oin  vc.ir  ui  oi-d.  r  to  rai>e  the  prici  .  'i'hi>  tein- 
pDi'jiry  susjH'Hsion  of  pi.anlui;^  in.idi    necossarv  some  other  mode 


,..._,  ,,,^ 


•  t(V«'lttl)t'^lt         « 


n;uti  (I 


(    I  lit  I        I  M  f  I    I  I        j  f I  t I  f t  li 


40 


M'lM.v    AM)   15.\.\Ki.\(, 


''"'^  ■""'  i"'i^'i''  'M-  c.ii;,,.,  ,i,„.  ••;„  .1,    ,        . 

^T;^r' '-- ^-:M..:^:';;::::■ ;::,::- 

'II    U)S:i  ,ui  (  \tr:i(>r,|,narv   .,,;,*• 

'II''   inu    pn.-,.   ,,f   inlruv,,         M  ,  "" 

,.^,       ,.      '     .         '     ""■'""•      -^'■"i>    I"'.,, I,.  .,„,„,!   ,,,,,„„„   ,.„. 

;;:;:;:;:.'"  rirr'"''' '■■""- -■ '-'■ ■■■-- 

scKr.    to--,   III,   ,•    ,,||,i    „, 

pl.iiiK  uli,  r,  v,.j-  c, I 


"M"-l    u...    ,i.,t    or.int,..,.   tli.v   I, 


ImikIwI  tlifiii 
;'   *'"""^l''l'"-»n.;rv.l,.>,n.vin;;.t.,|,,..,vo 

^:  A,.,.  H.M.H:r, ::,!,:  :;'T';'^'';'\'''''''''''' 

::;;  ■:';■;■'"•;' :■■""> "I'"  I -^.in,„,  „:,:::; 

-'I--'"- Ml,,.. I,    , 

■■;■'"'■';":•' ■■•■■■-.I ■ -...i 1,1  „, 

;;■;"«,' ■•''' ■■ >■ in.t,.i.-,,^„ 

>'irt  I  r  (leal ),_  " 


•T-    .111(1 


H'  ii.a- 


t:..:i!:r'-  ""■ >•'- '>- ■- 


'"■''■'"'^   li"l'-.  .mil Ii.,.       Tl„.  t„lMr,., 

Hie     IVai     III 


i(  re 

i"-    i'(    liic  (IIn- 
' ".^    """""-  l'.nHl..uu|., nu- ,1,    ,„„,^, 

"■'■"   ill    III''   U.Uv||,,|,.r,    ua, 

,,         ", "  '''— li'iiiU''.      Til,.   ,„|,a,v„   nn,,.   .,,,.  ,„,,.; 

III'"!'   .1  i'<  l.iii_\.      In 

||'   i!"t'  -.""   ".!>  Illlro- 


'■>  I  .iiMilli,  1-  \arii  t  \    ,,|'  , 


I'  II  l"-\  .  (all,  ,1  ••,■,, 


"  -'      "'  IV    l>MI,(l 


cask    li,  inn    In  111(1,  , I  ami 


'"■  I'"-'"  Hi."'  'n-k^   ni-  f„|.a.,„.  .a. 
'"     '"■"•'^^    ^p.(i(„.|   n„    111,,   ,„,!,,_ 


Ml!      Us,       iiiilst      I 


"■     '"•"''      "I      f'''"ll     III     st;,(|n..-    f|„ 

::;„;:;",'■'•  \ '■'-■:■■'• '-■>. ■„:■; 

'^^'"''•''    "M"'!-.  liKi,!.    r,„-    MH-n.  V 


....i: 

•»'J«tiiii      ill      X.  \' 


K 


r.\()i.r'ri()N  or  'iiii:  mi.dicm  oi'  i:x(  iia\(.i:    ii 


V   (Hit   ()(■ 
iiN   for  a 
(  Ti  asiii^- 
'l  tlifiii 
tiiliacco 
nil-   III, if 
■|(    (luM- 
l.lt    fliiii- 
ImI  Ilia! 
II  a  I  Mil  1 1 
<'!■-  and 

tile  iia- 
i--ii(  il 

nt  aiiij 
«  Ik  re 

lir    (li>- 

IKltcS, 
I-    \\,-(s 
iililc  I•^ 
■     ^^c|■( 
n     aii\ 
.        Ill 
ml  ID 
.  (acli 


■  <lic 
li;is 

\r/.t\ 
tlir 

IKisI 
<  \- 


"3 

I 


iliaiiy'L'  is  i^c'iK'i'al  accc  i)tal)ilit\ .  It  is  this  i,iialiiy  wiiicli 
(listini^niishc's  tlic  iiioiicy  commodity  I'l-oin  all  otlicis. 
As  a  rule  a  coiiiinodity  ln-t-omcs  iiioi-t*  ac'cr|)ta!»lc'  in 
(  \('}iaii<^e,  tlic  Ifss  its  otlu-i'  utilities  arc  cousidt-nd.  ainl 
Ilk'  \\i(K'!-  its  use  as  a  nu-diuiu  of  cxcliati^f.  This  tiiial- 
ity  (if  acc't-ptahility  dcpruds  ritlicr  u|)()[i  a  ufil-tstah- 
lishfd  tradition  or  upon  an  ultimate  inarixet  uhei'e  it  is 
estei'iued  for  its  \\.int-satisfyin<^'  |)o\ver.  Oi'nauieiits 
possessed  this  (juality  to  a  lii^h  de-^i-ee  heeause  this  hu- 
man desire  nas  almost  unixci'sal  amoni;'  primiti\e  peo- 
jiles.  In  the  eas(  of  luavci-  skins  and  \\ami)uni.  the 
insatialde  demand  maintained  their  aeeeptahilitv  of  e\- 
ehan^e. 

Uk  Divisihilil//.  ][  is  liiuhly  desiral)le  tliat  the 
money  eommodity  should  i)e  eaj)al)le  of  division  into 
small  units  in  oi'der  to  ser\c  as  a  medium  in  small  trans- 
actions. This  (juality  of  di\  isihility  was  absent  in 
liea\(i-  skins  and  cattle.  C'ommoditiis  which  contain 
small  vahu'  in  hu\uc  !)ulk.  which  with  the  amouu*  of  them 
JK'fVssai'y  to  make  e\tn  a  \(i-y  ordinai'y  transaction  i'e|)- 
lesents  so  ^rtat  a  Milume  as  to  he  difficult  of  tiansporta- 
tion,  are  unsuited  for  th.e  pui'posc  of  monc\-.  When  the 
value  of  tohacco  fell,  the  dilliculty  of  transportiny'  it 
added  to  its  othei'  disadx  aiitaut's  as  money.  'I'lie  C'lii- 
nese  i)roir/,e  coins  of  the  present  day.  called  ■'eisii."  oc- 
casion ^I'cat  inconvenience  to  ti'avclcrs  who  must  caiiv 
a  mo<lcratc  sum  with  tin  in.  Their  hulk  is  so  jjreat  that 
s(  parat(  conveyances  must  Ik  ustd.  and  it  is  oulv  a  (|uis- 
lion  of  time  when  they   will  he  eliminated  on  accounl 

ol    t  heir  cuillhelsomi  liess. 

17.  I  iiij nniiit It.  I  niformilv  is  another  hii^hiv  nec- 
essary (nialify  in  money.  Win  n  the  estimates  of  value 
were  only  appioNimalc  it  was  no!  so  necessarv  that  the 
units  of'  the  cnrreticv  shoidd  'k    umtorm.  hi-t   when   the 


4« 


-M()M;\     AM)   HANKIXd 


cxdia.i<^i,,^  InraMR-  ,nn,v  ^rnrral.  th.  hu-k  of  u,,ir,,m,- 
'ty  n,  the  units  hcranic  a  serious  ohstade  to  their  ..,„- 
eral  acceptahility.      The  laek  of  this  verv  neeessarv  <mal- 

<y  nuulethenMalues  very  in.letenninate  and  unm-tain. 
Heaver  skms  uere  unsuited  for  th..  purpose  hu^^elv  on 
this  account.       1  ohaeeo  was  liss  so. 

.ty  ot    un.lornnty   is  that  <.f  c<.o.ni.ahih-tv:   that    is    the 

possession  of  certain  ..uaHties  uhieh  are  distinctive' and 
^■as.ly  reco^,n.ed.  either  on  a.rount  of  color,  texture  or 

H'.^ht.      ^^;^npu,n^vhich  possesses  so  M.anv  of  tlu- other 

<l"a<t.es  desu-ahle  in  money  failed  in  this  important  pa- 

-Uhu-      .t    e,add    IH.    easNyc terfeited.    '       '..cl'of 

t"squahtyotc-o..n,xahih'tycanheovc.reon.e.,   the  use 

"     some  mark  uhich  is  either  diflicult  to  counterteit  or 
;:'"•''   ;•'"'    '-^^   i';'"»--t-i    ''.V   severe   penalties.      The  oM 

a.s  ulnch  made  counterfeitin.-  a  capital  crime,   pun- 
^sI.ah  ehy  death,  u.re.iustitied  when  then,    .ssitv   for 

•'''''''tM.nn.u-  the  quality  of  c-oo,,i.ahilitv  in  the  curi-enev 
-.pprcnaed.      Most  of  the  early  cun-encies  ..„.  „;• 

"t-1  lor  that  use  hecause  of  their  hahihtv  to  detenora- 

"•"•      '^-'''''''''i'ty  which  has  this  defect  is  unsuitc.l  as 

•    s    '.vol    .alue.  an<l  the  UHMMcnt  the  deterioration  hc- 

.u      to    akeph..     ,Mosesthe,uaIi.yofacceptal>ilitv. 

4.>.  sMn  „i   ,,/,,.     „„^^  „,.  ,,_^.^^    ^1^^,  ^_^^  .  _ 

''''•'Y'--  i..vn  elin.inatcd  hy  tlH.  use  of  H.etallic  coins. 
'"'   '••"•■'•  '•>.    '"■  "-  •"•  --«lit.     Tlu.re  is  one  <,ualitv 

'■-•--Oneh  n.,dlic  currencies    fail  to  possei.  tha 
-;t.-''"l    v'.ivahic.      'Ihewhoh cs.ion  of  M.e  stand- 

"':'^'"""'    ""■   "'"''■   -'.Iroversy   ov<  r   sih,,-  and    ..oM 

ansos  ..ut  ol  this  charactenstic  lack  of  stahditv  of  .  due 
;''''7''''<'  -''-''  7  siull  disc,. sat  len.,h-p..,,,K.; 
""■'"'•■'In-.lto!  tins  process  of, . vol,. tioni, 


.,...,.. 


I    ,.  ,  Hi  iiioncv.  the 

''  ^-"'^"■'•'''  "i    i'.e  unlit  an.i  the  extension  of  the 


i,\()i.i'i'i()\  ()!'  'iin:  Mi'.DiiM  ()!'  I'.xcn.wci:    ni 


iiilorni- 
■ir  <ivn- 
■>■  <|iial- 
I't'i'tiiiii. 
^vly  oil 

(-*  (|iial- 
is,  the 
\t*  and 
turr  ()!• 
V  oilier 
it  par- 
ic'k  of 
lie  list' 
IVit  or 
\c  old 

|iiiri- 
y   for 
■fciicy 
■(■  ini- 
riora- 
trd  as 
II  l)(- 
lility. 
ts    in 
■<»iiis. 
ality. 

tli;it 
aiid- 
H'old 
;duc. 
iilly. 
.  tl"..' 
•  the 


ii.;  i)['  foiiiiiiodilies  ,)o.ss(.'ssiii!4'  more  of  IIksc  (Usirahle 
ijiialities,  was  llir  iiiii\crsal  use  of  the  metals  as  moiuy. 
i!(  uinniii^"  witli  the  eommoiier  \arieties  of  nutals  like 
lii<iii/.e  and  iron  in  Ijie  form  of  the  utensils  whieji  serve 
I  useful  |)iir|)ose  otinr  than  exehaiiii'e.  we  may  t  I'aee 
iliiwu  the  (le\elo|)ment  to  the  coin  whieh  has  no  other 
|iur|)os(.-  than  to  he  used  as  a  medium  of  exehani^e. 
Adam  Smith  s])eaks  of  a  \  illa<4''  in  Scotland  in  his  <hiy 
where  nails  were  used  as  moiu  y.  The  ii'eneral  use  of 
hnllets  amoii;^'  the  American  pioneers  in  the  cliase  and 
III  warfare  against  the  Indians  made  them  i^iiod 
^  '"chaii'^e""  ill  the  early  days  of  \ew  Kn^land.  In  the 
liistoiies  of  (ireece,  w f  reail  of  the  \n\;j;c  and  hea\y  iron 
-;  (oius  of  S|)arta,  whii-h  snr\i\-ed  he\i»nd  their  timt  on  ac- 

■  eoimi  of  till'  hostility  •  \'  the  Spartans  to  ti'jule.  'I'hey 
s((iiied  purposely  to  ha\e  retained  a  most  nnsuitahle 
form  of  money  for  the  ])iirpose  of  hinderiiiLt-  exi-han^^c. 

The  (It    elopments  of  hettei-  methods  ill  minin<4'  and 
:    smelting    the    commoiu'r    metals    such    as    hron/e.    iron 

■  and  tin  made  them  nnsiiitaiile  for  the  currencies  in  any 
form.  'I'heir  defect  was  in  their  ciimltersomeness  and 
ill  the  dilliciilly  of  carryiiiLf  thi'iii  about.      'Idle  jn'ocess  of 

i    (  limiiiation  lie^'an  with  the  eheapi  r  and  tht   hea\  mi-  uiet- 

■  aK.  until  at  last  the  sole  sur\i\ois  were  sil\(  r  and  i^uld, 
'  cept    for  the  \»'rv  smalkst  of  c.iins. 


i^vou-rroxo,   ,,n:sTAN,)un,c,rvu.rK 

l'f<„  tnV.i  ■n„i   Ion,    I  •  ''''<^*''"^'   HiaptcT   |,a,l 


Hu-ir  scarcity  and  (he 


tlu.  carli,.,.  funns      v       '     ^^^ ''^  "••'''^'''A^-  ''m  most  of 

'- ;-.«••::"  ;.Jn::;:l,;;^;;'':!;:!::::,'':': -•: 


•'1.    C/oo^/  r///^///7/V.v.~HntIi    i,.,f..l  r   •    I        ■ 

"' '«i-../ K.i,  s„     :'''v:'.- ';■''.'>■ ''"-'■!'■. 


'"''I  .-ukI  silver- 


''•'\'    '••"•«•(■  value  in  sinal!  I.nll.     ..in ,    ..      .  ""  •' 


H 


^■licapriiss   (.r  siK..,. 


'"^''^  '•""-  ^''"'""'A^l'  tlu.  inm.asin:. 


I    I    , 


"    '"   '^^   ;i"aii.i()iinnMl  a 
41 


s   a 


i:\Ul. ITION   OF    Till:  STANDAKl)  OF   \.\l,li:       K 


'lie  liis- 
law  of 
nil  the 
tr  liad 
settled 
;ils  /'()!• 
I  ^reat 
laimiit 
lul  the 

lleni     ;i 

lost  of 
'  statr 

)  that 
icil  ill 
llie  ;|  , 

nietid 
to   its 

■ah!e, 
j»ar- 
soine 
.il\cr 
aerl- 
se  ill 
I'hev 

siljM 

IS   a 


inoiiev  metal  within  I'eeent  yeai's.  'I'hise  metals  are 
peeiiliai'ly  adajjted  to  the  |)roeess  of  eoinaye.  arid  eaj)a- 
hk  ol'  l)eii!Li'  eliaiit>ed  in  t'onii.  si/e  and  sliapi'  without  a 
^|)eeially  ditlieiilt  prot-ess  of  nianul'acturinu'. 

To  a\  oid  the  di\  ision  of  sil\  er  and  <4old  into  (juantitics 
so  siiiall  as  to  he  inipi'at-tieaitle  in  handling',  the  baser 
metals  aic  ^^cnei'ally  used  for  eoiiis  of  niiiior  \alne  where 
till'  defect  of  small  \ahie  in  lariic  hulk  does  not  a{)j)ly. 

.")■_'.  I'Idlitiii III  niisiu-ci  ssfiil  as  iiniiu//.  Of  the  moi'e 
e\pensi\e  metals  |)latiiuim  is  tln'  only  one  .  liieh  has 
lirri!  tried  as  money.  In  18'JS  the  Hnssian  (Government, 
which  owned  the  principal  platiimn.  mines.  I)e<ian  to 
coin  this  metal  into  pieces  of  three,  six  and  twelve  ru- 
lil(  s.  a  riihle  then  heinu'  worth  ahont  7.")  cents.  I^latinum 
has  s(\(ral  (piahties  which  lit  it  for  use  as  money,  par- 
ticularly its  (hirahility  and  its  oreat  density,  which 
iiiakc>  it  easily  (list iii'^iiishahje  on  account  of  its  weight. 

I  "urthennore  it  oxidizes  \  cry  slowly.  'I'he  experi- 
iiKiit.  howe\  ci'.  I'cxcaled  si'\fral  fatal  ohjictions  to  its 
use  as  com.  'I'lu  re  is  no  ureat  amount  of  it  in  use  in 
commerce,  so  that  the  \alue  of  it  is  lilvcly  to  he  \  cry 
unstahle.  Heeause  of  its  extremely  lii<>li  melting  ])oint. 
Ihe  cost  of  maiiii  i'aeturiii!'  the  coins  was  wvy  oTcat,  and 
it  coidd  not  he  ea^dx  con\trted  from  hullion  to  coin  and 
from  coin  to  hullion,  a  feature  which  reiidi'ivs  i>'('ld 
and  siUer  \ei-y  siiitahk'  for  money.  Thcsi.'  objections  in- 
duced the  Russian  (ioNcinment  to  abandon  the  cx[)eri- 

II  Mil  I    in   IHl."). 

.").'{.   (Ut'jiciidiis  f(     <^()U1  (t>i(l  silx'cr.  -  (\n\{\   and  sihi'r 

III  hullion  form  arc  b\  no  nuans  the  ideal  monev.  Thev 
are  dillicult  to  identify  at  sinht  without  the  use  of  tcst.s, 
\\hieli  ;ii(    too  (  laliorate    for  oi'dinar\'  use.  so  that   it   is 


ras\     lo   eoumei'l  en     liieiii. 


1  iic\     aiso   are    an  cetcu    i)\ 


w 


ear  and  the  (|uestion  of  loss  of  weii^ht  in  handling  has 


46 


^"'M:^      AM)     I{.\\KI\(; 


;'^'i'nc.slHvn.s.nousn,K..     Inn.: 


"t  finics  rsjKvfallv, 


])rnhh,n.  or  .,  sen.  "'   "■^■■■'^^■''   "">"c'tarv 

^  .MMnnsnahnv.  asuasilinst,.alc.,lhvth; 

'"    •^"^<'    ayifalion    ( Hr  in.'  tlic   r.vf  * 


.>».  ro/,/.,.;<,      ',>,,^.  ,i,,^j  tuo.Ic.f,,. 


^"^'••I'ln'ilitv    to    u(.,r    .,n,l  -^ -';'•""*".  I.e..  f|„ 

;•"■'■'■"""■  I" "  ''■■•i.,„  ,„,,„  I,, , ,,„;".,,,'■':  "'',' 

•'  'l'"iililv  ,.r  „iil-,l  will    .,  '      ■•tanip„,„  „| 

■rni-i:..„i„„, ,., ,,i-  ,,■' ''■''"'"' ""«•'"■''«■■ 

^'-'i-' '-,„,„ 1  J;;:, ,:::';: ';','"'-;: 

^IVUiiia.  in  nr.l.T  t„  r-.cil.>.,h.  '  '"'"'  "' 

"■■■?:'■':! ^' -I-' ■H.,,H,,,i'-;;:::;:::; '™'''"'' 

•'■I-   -'K'ncv  (./■  ,■(./■);«-  'I'l :. 


'■'"";-■■    ■'!'"■  "•■'■"<■  "!•  till'  K„„ii,h  ,„ 


l''-('ncli    con.    liviv     dl,,.    i.',.,,.    i  ,  "''  "''' 


I 

'"'•  "'-''"•■•'ted  ll.at  tluv  uVrc 


'";;- ^'-H..!:;s.':.,::,i;::::i'::;:x.'"""'"'''-^ 

'«      ^^.is     pn.I.ni.lv     un[      In,,,,.     |,,.,np<.     H  •' 

^•l"il<'  lil>-lv  that  l|„    |,.s  ,  ''>"'"'ses.      it 

"—.I l"i.';::/"'::r;;r:;:;:;':;-'"™' 


'   Hie  iiKlal  or  sul). 


"■••!<•(■(    tni, 11  III,,  v).,,         I  ■-  "i»-i.u  or  suD- 

cn'ciiiiiv.  n(   II,;.   I .   '         •    ""'t"'i'>i<-'.      I  () 

,,,,,,.,,        ,   ■,; I'i'^H, .(•(..  rile  .stamp  in,.,,,  t|,. 


cir 
eoiii  \ 


%< 


n.  we 


unit 


lent 
H 

K'Cfl 
Ul). 
U'C. 

To 


i:\()i.ri'i()N  oi    riir.  standaih)  or  ^.\LI  i:     t: 

so  as  to  make  dilHcult  the  iihstractiou  of  any  ^)ortion  ol' 
it,  and  besides  to  inserihe  on  \hv  eoin  the  name  ol"  the 
person  eertiCyin^'  the  wein'ht.  'I'o  |)revi'nt  the  wearing- 
away  of  tlie  inetah  it  heeanie  enstoinary  to  mix  in  the 
coin  some  liarder  metal,  ea'ded  alloy.  Auain  this  eon- 
venient  (k'\  iee  was  ahnsed.  and  it  was  fonnd  prolitahle 
to  inli-odnee  into  the  coin  a  i>Teatei-  amonnl  of  alloy  than 
was  enstomai-y.  'rheren|)on  it  heeanie  neeessai'y  to  in- 
dicate in  some  way  the  fineness  of  the  metal. 

.■)»;.  Jii'qiiiri'iiicnls  of  ^ood  ci)iu(i;i^c. — At  this  stage  of 
coinage  several  considerations  had  to  he  observed:  It 
was  necessary  that  the  stamp  njjon  the  coin  shonld  cer- 
tir\-  that  there  was  a  certain  amonnt  of  metal  of  a  cer- 
tain fineness  in  tiu'  coin,  that  none  of  the  metal  had  been 
abstracted  after  the  stajn|)ing  of  the  piece,  that  the 
(K\  ice  co\  ci'  the  whole  face  of  the  coin,  that  it  be  ;^'nar- 
antced  b\  some  reliable  j)erson.  and  that  it  shonld  be 
diflicnlt  to  connteifcit.  The  i^reat  a(lvanta<rc  to  com- 
merce in  ha\  ing  <4ood  coinage  led  to  the  gi'adnal  restric- 
tion of  the  I'ight  to  coin  money  to  a  W'w  i-cliable  ])crs()ns, 
and  finally  to  tlu'  so\ereign  himself. 

This  restriction  of  coinage,  howc\er.  did  not  elim- 
inate the  abnses  which  we  have  mentioned,  for  the  royal 
antliorities  foi'  man\-  centniies  made  large  profits  by 
debasing  the  coinage,  both  by  I'cdncing  the  size  of  the 
coins  and  In  incicasing  the  amonnt  of  the  alloy  in  them. 
'I'his  fact  can  !»(.■  easily  demonstrated  ])y  reference  to  the 
coins  of  to-day.  The  English  ponnd  sterling.  whi(  h 
originally  rcpriscnted  a  ponnd  of  sil\(  i-.  finally  came  lo 
represent  abont  half  that  amonnt.  'i'he  people  became 
so  accustomed  to  receiving  coins  according  to  theii-  face 
and  without  reference  to  their  weight  that  the  debased 
coin  of  similar  wei 


4A 
#1 


as  ever. 


ght  had  the  same  pun-basing  power 
The  needy  monarch  conld  melt  up  the  old  coins 


■w 


mcim;\   ,\m)  dankim- 


'  '''■'M.--S  I,,, „.„,„.  Uk- sa„KM,aHK^  ..,,Kl  Ih.s  „„.",:. 

':''•''-  ■IP.-C-.I  "ili,,,,,,  p,,,,st.  If,,,,,-  VMI 
'  I  1-MKla  .1  ,l,st„,j,„isl,,,|  hi„„,|r  l,v  m,oatal  i.- 
'lNlKOlKv  m  ll„s  |„„lilai,l<-  prarti,,.  •  '  '" 

,.,'■'/';"'''''"'   "'"'": ""I  '-'il'l-'S  "I-  coi„s   wc-c  ,, 

:''"'■'■■'••■■".;•; -■  -^^  ti,™- iK.t  .!,„  ,>.,.  '  '    : 

""■",'  '"  ''"I"-'-  "■.■.>!„  „,  H„,,„,^,-   ll„.v  1    ,    I 

"""■'."-I""' ■■•'■   ^y  --,i„«  and  ,        ,i    : :'    T 

'--"■'■"'"■s«"v..,,,,.la,,,ly,a,lk..l.,,,tt„nak:r,.,, 
-;<'Kli     ..I,.      |„„«,   „,|,„|,   „.,„_,.,,^,_|         j.„.'',,„|„„.  .■ 
«i■<■"    l,«hU.,.  an,l  lio.,,,,,,  nntil.  in   ia-,2.  tlu.pl™  , 

.-.7.  A/,,,,,/,,,,,     /■  ;.„/„,...„,■,,  ,„  ,|,i,     „i 

.^1"H,,.,I,I,.  M,l,,,.,,  ,,r„K.|aMi..„,n,,..vr,,,n,|.c.  s,    ;r 
I'",'"',"'   ''^''""•'i""-^anK.di„n,nr  ,,,!,„  :,'.'' 

••■-;'^«.-Mnn„.s,a.vnn»,v.  .,.„,,,,,,,;,,,,, 

"'"■      ""    'I""'""'    "I    H,c    Innrtiun    nf   „„.|..ii:, 

"".""■:\^'^  •■'  ^'^ -■•l"|-valM.  invn|v,.s,,nd..d"!V: 

|)niici|)lfs.  *  <''ircKiu 

15y  a  slan.iani  or  vahuMv.  nu-an  tlu- ,:sr  of  a  met-,1  .s 
a  (iic.'ism-..  f',.,.  )iw 1..         ,.    ..     ..  'I  liituu  as 

..   ,     ' '"  '"'    'i'!<-T  coniniodities      Tfw. 


i;\()Lrri(!"   oi    jiii  .^^.\^l)Al{l)  of  \aui; 


r.) 


Ill- 


i 


I 


stiiiitlifd  is  stal)ility  <»!'  xaliic.  Since  Naluf  is  tlic  result 
of  a(l_justii  ''lit  iR'twcTii  supply  and  (kiiiaiKJ.  it  is  ()l)\i()us 
tliat  our  slaiuiai'd  nit'tal  must  not  l>t'  suh'ix-t  to  excessive 
tlnctuatiiins  in  eitlici-  of  tiiest'  jjai'ticulars.  Tlie  prin- 
cipal nion(  tai'v  ))ii'l»i(  ins  !)!'  the  past  centui'v  lia\  e  arisen 
out  ol'  conti'o\  eisies  rcyardinu'  IIk'  standard. 

In  ancient  times  Itotli  i^old  and  siher  were  used  as  a 
standard,  and  no  dillicully  rose  tlieicl'roi'i.  pi'incipally 
because  there  were  no  t^ri'at  clian^fs  in  the  supply  ol' 
!'i(se  II  ':iis  a, id  I)ecause  trade  was  so  pom-ly  de\t'loped 
that  di\.  r^cncies  in  values  were  not  impnrtant  enoUi;h 
to  create  serious  inconveniences.  It  is  only  in  communi- 
'it>  where  industry  ami  commerce  arc  hi<^hly  organi/A-d 
t!i:it  small  chan;i,-es  in  the  measure  of  \alue  are  iiotii'c- 
ahle.  The  case  is  similar  to  that  of  en<iineerinu':  I'or 
'  xample,  in  e;n-li(  r  times  id"  cruder  cons!  i-uction  there 
was  [)ractically  no  need  of  very  ai'curate  mcasui'iny-  a|)- 
paratus.  Diirercnces  of  a  fraction  of  m  inch  oi-  milli- 
inet(  !  could  he  disii<;ar(l(  <!.  A\'ith  improved  teclmiciue 
a  d  finer  pi-whlems,  it  is  nec-essary  '  have  th<'  utmost 
accuracv  in  UKUisuremeiit.  'i"he  standard  of  value  is  a 
iiieasuriir'4  appai';itus  i'or  values  and  it  is  only  under 
hi<ih.iv  deveIoi)ed  commercial  coiuutions  that  minute  ac- 
curacy is  essentia). 

.')S.  Ddiihlc  .slfimJard  pussiJAc  iniliJ  hist  rcntiir/i. — ■ 
Uuritii'-  the  Middle  A<>es.  <>'old  l»ecame  so  scarce  that  sil- 
\vv  was  })rac-ticall\'  the  only  coinage,  and  so  the  Vai- 
ropean  nations  v\(  :  on  a  silver  standard.  The  i'all  in 
the  value  ol'  silver  ai)out  the  time  of  the  discovery  of 
America  created  a  demand  foi'  coins  oi'  "^I'cater  value  in 
small  hulk,  and  as  there  v\  s  ;i  uiciitir  production  of 
_U<)1d  at  this  time,  the  use  of  u'ol  I'oins  to.u-ether  with  the 
silver  hecaine  more  common. 

Tt  is  impossihlc  to  understand  tile  intricacies  of  the 
\  II    I 


50 


M(>\i^     \\i)   i{\\Kr\(i 


.sf-'iiidard  .|iKstin!,  iiitil  ^u  k,i,.u  jiisl  |,n-.\  III,  vainrs  r.f 
tlir  coifis  nvc  (l.t'/n.ii.K.I.  n,,t|,  silv.r  jmh)  -,.|.1  ;,,-,.  n^,! 
to  .s;idi  ;,.;  rxtrnt  in  the  .iris  lli;.t  tluir  .nine  is  (Ktcr- 
iiiiiK-<i  in  lai-of  nuasurc  hy  the  dvuv.i'.ul  r<v  tlicm  tli-ir 
in  reliifion  So  the  supply.  Tlu-  iinnt.  .-nr  al\va-,s  ohi.i-v.i 
to  (Iran  tlicir  '-npplx  of  imiiion  from  the  (,p,n  i::arkct. 
and  unless  thry  <.fier  the  market  priee  they  are  uuahlJ 
to  obtain  any. 

Sui)|)(.si'.  for  example,  that  the  s.ipply  .,l'  ^ih  er  -rad- 
u.dly  diminishes  while  the  demand  I'or  il  in    he  m-irket 
is  maintained.      Xatnra.lly.  the   prodneers  of  silver  u  ill 
he  ahle  to  oiitain  heiUr  terms  for  it  th;>n  before.     .Jew- 
elers and  other  i)ersons  wishing  to  use  silver  in  their 
business  will  melt  up  silver  eoms  instead  of  purciiasin.,^ 
the  bullion  at  the  hi-lu  r  ))riee  in  the  eoina.ue.     l^jide"- 
these  conditions,  peojjle  wr„i|d  hemn  to  disenminate  he- 
tueen  silver  and  .uold  eoins.  selling-  the  silver  coins  to  the 
jewelers  at  the  premium  whieh  would  i),-oI)abK-  be  of- 
fered for  them.     The  (Government  would  be  unable  to 
H'ct  silver  for  coina-e  purposes  unless  it  ,yave  a  much 
larger  sum  in  <.(,|,|  |',„.  jt.  ;,,i(l  if  the  C Government  simplv 
^ave  hack  the  silver  in  the  form  of  coins,  these  coijis 
would  (piickly  retire  from  circulation. 

oO.  Grrsha Ill's  Latc.^Thls  principle  is  called  (Gres- 
ham's  Law.  named  from  an  ollicial  in  the  reiou  „f 
Queen  Kli/aheth,  who  first  observed  this  tendeircy  of 
people  to  discriminate  between  two  coins  of  the  same 
nominal  value.  The  simplest  statement  of  this  law  is 
that  the  cheaper  money  tends  t.)  drive  out  the  dearer, 
that  is  to  say.  when  the  peo|)!e  for  any  reas<.n  beoin  lo 
discriminate  between  two  coina;«-es.  they  will  invaHably 
l)ay  out  the  inferior  and  will  hoard  the  better,  thus  re- 
iuo\in<4-  it   from  circulation. 

The  only  remedy  for  this  eonditioii  w(iul(l  be  for  the 


i:\()i  r'iit.N  ()V  Till;  s'iandakd  oi"  \.\i,n-: 


[Viui- 


I 


mints  to  cnnslaiillv  niter  tlic  aiiioiirit  of  nittal  in  tlir 
I'oius  t(i  coriTspdiitl  to  tlnir  coiiiiiMMjity  \altic  in  the  mar- 
ket. (Jold  ar.d  sil\er  are  so  easily  transuofted  I'rom  one 
(■(UMitry  ♦<>  anotlier  that  ehan^'es  in  theli-  \alu','  at  an\' 
['.iiticnlar  jilaee  will  (jniekly  spixad  thron^hont  Ihi  coni- 
intreial  world.  I'or  ixai  .  iC  ;i  new  sihc-r  mine  is 
diseoiei'cd  in  Son''!  Ameriea,  the  inereased  .supply  oC 
>il\er  at  tl'.at  place  will  hiwei-  its  \alne:  tlic  producers 
will  oirer  it  on  easier  an  easiei-  tei'ins  in  ex(iiap.<''c  I'or 
i^old  or  anytliinf.^'  else  oj'  valne.  Silver  w  ill  ayain  l;egin 
to  he  exported,  for  it  will  eommaiid  a  hi/^her  'j)riec 
ahroad  than  at  home,  hot  the  I'esnit  of  thns  increasin<f 
the  sujjply  in  other  countries  will  lower  its  value  there 
until  a  new  e(|nililH!nm  is  estal)lishe(l. 

li  is  of  course  impossihie  I'oi-  the  mints  to  contiuuallv 
alter  the  ([uantity  of  metal  in  the  coins  to  cori'ispond  [-, 
tiieii-  ni;ii'ket  values,  l'',ven  il'  they  did  so,  the  old  coins 
!ii  circulation  woidd  lia\e  a  \alue  either  o-re-iter  or  iess 
than  their  face,  which  w;)ul(l  cause  one  or  the  ovhjr  of 
I  Ik  in  to  I'cHi-c  fj'oni  circulation. 

tiO.  Mi.sl(tl,(s  of  idrlji  l(\^isl/il(irs.-—'Vh\s  tendeney  of 
UK  t.ds  to  ihu'tiiat*'  in  value  was  no!  ur;derst(!od  unli!  re- 
cent Iw  and  the  i2'()\  ci'nmcnts  were  constantlv  tr\  ina'  va- 
lii  us  expedients  io  force  the  circidation  (,f  ),ioth  metals 
111  till'  face  of  natural  laws  to  the  contrary.  As  is  usual 
\\ith  Icii'islators  and  otHcials  who  ai'c  ;lealini>'  with  a  mat- 
li  V  which  they  do  not  uniler.itand,  they  souuht  io  deal 
with  Ihc  symptcMus  rather  than  the  cause  of  tlie  trouhle. 
To  this  'lid  they  passed  hr.\s  foi-hiddin^-  irade  in  llic 
liiccious  metals.  'I'luy  placed  ohstaeles  in  the  wav  of 
export    ,".nd   import,     'i'hey   made  )neltin<4'  th.e   eoms  a 

Ci'innn.'ll    ofVcll'a-  \  >.:    iv    ii>-.iiMi    \>Itl)    mwrii'iit  ifir>    l-i.^c    l^i' 


\h 


this  character,  they  wire  im])o^sihle  of  exeeut 
Acre  constantK'  (\aded. 


lOtl,    111 


id 


1 


^I()^]:^    wd  hankinc; 


<il.  J-Jjjicricnic  of  En^;l<niii  :Jl/i  timihic  slaiuhird. — 
The  ti-iK  soliilioii  (,f  tlu'sf  tlillic'iiltits  was  first  rcaclicd 
in  J'Ji^laiui.  This  comitry  had  had  h(.r  share  ol'  the 
loss  and  vexation  (hie  to  ehaii/^ts  of  the  ratio.  Slie  had  ^ 
also  \  isiled  erncl  puiiishineiits  on  iii(h\  ichials  I'oi-  niejtiiin- 
and  expoi-tino-  tlie  |)reeions  metals.  All  attein{)t.s  to  eii- 
i'oree  thest'  t'oolish  laws  wer"  e\entually  ahandoncd,  and 
it  ( aine  to  pass  in  the  rei<;n  of  Charles  I  I  that  the  ouinca 
of  ^old.  althon;^h  proclaimed  hy  loya!  authoritv  to  he 
the  e(|n!\alent  of  :i()s.  in  siKcr.  passid  in  trade  for  'Jls., 
and  no  attempt  was  made  1)\-  the  noxernment  to  inter- 
fere. Tile  Huinea  I'emained  as  a  trade  coin  till  tlie  third 
year  of  (Jeoroc  \  (1717).  when  anotiier  proclamation 
\' ;;s  issued  inakino^  it  legally  e(|iia'  to  "Jls.,  at  which  fig- 
ure the  I'alio  to  sihir  \\as  ahoti*   i.")  1-.")  to  1. 

As  i4()Id  was  sliuhlly  oxcri'atid  at  the  I'atio  of  I.')  1  .■), 
tlki'e  was  a  tendency  to  (  xpoi't  sihtr:  and  for  this  pnr- 
|)ose  the  full-W(iulit  coins  were  scleclrd.  So  it  came 
iihoiit  in  the  course  ,,f  li;,!f  a  cenlury  that  'he  onl\ 
sihcr  coins  i-emaiiiino-  in  circulation  w<!'e  those  which 
had  heen  \\\\\v\\  I'educid  in  wii^hl  h\-  ahrasion  or  h\- 
tVauihdcnl  clippino-.  'I'll,,  (vil  In  came  so  intoK'rahk' 
that  ParliauHnl.  in  177  K  passed  a  law  pro\  idin-;  that 
-iher  c'Mii  should  not  !»r  le<_;al  t(  ndcr-  for  more  than  !.'•_'.") 
in  one  |)ayiii(nt.  e\ce|)t  hy  weight  at  the  I'atc  of  ,)s.  2d. 
pel-  ounce.  It  was  enacted  at  he  same  time  that  H(,!d 
coins  deficit  tit  iti  W(  iyht  should  he  called  in  and  rec  lined, 
.uid  Ilia!  tlure  a  fter  such  coins,  i  I'  under  a  certain  weiulit. 
should  not  he  leo-al  tetidci  at  all.  The  restriction  of  the 
\v\X'\\  tendt  I'  M'  silver  w;is  |o  (onlinuc  two  \eai's.  The 
c.\|)(  I'lalion  of  l*ailiam<nl  was  that  some  rfl't'ctual  and 
J)criiian(nt  steps  would  hi  taken  lo  Ava]  with  the  e\  II 
of  liuht  coins  in  th;d  iulei\al.  hut  since  n<.lhinu'  ^^-'^ 
done,  the  a<'l  ipf  I  77  I-  w  as  n  riew  < d  in  I  77<''  lor  two  \  .'ars 


I 


I 


r.\()M  'ii()\  OF  Tin:  s'l.wDAiti)  of  \  .\i.ri: 


■1 


/y/.— 
u'lic'd 
I"  the 
L'  had 

()  C'll- 

,  itii(i 
iiiiica 
t.)  he 
•J  Is., 
iittr- 
thinl 
at  ion      i 

-p.\ 

'-  1 

|)iir- 
fainc 
only 
\  hich 
r  hy 
rahlV 

that 


iin(i. 
i-hl. 
r  thr 

The 

ami 
evil 
was 

.-••ars 


llinii-, 


In    ITTH   it 


A\as   iHiK  \\  «,(l    lor  .s(\(ii   \fars.  aiia 


Ih^ii   hy   i'c|)(.att(l   rc-iRuals   it   was  cai'ried    forward  to 

17'.>H.     iViiothci'   clause   was   now   added   that   no   more 

il\er  should  he  coined  at  the  mint   for  prixate  ])ersons. 

CiL'.  Adoplioii  uf  siii^lt'  :^<}l(l  slduddid  iniiiitciilioiKil. 
—The  si^nificauct'  ot'  this  ici^islatioii  was  not  j)t'i'cei\('d 
at  the  time.  It  had  not  ])vv\\  the  intention  of  Parlia- 
iiiciit  to  estahlisli  the  sinolc  nojd  standard.  The  (jues- 
fion  of  statidard  was  not  undci'  consideration  at  all. 
What  Parliament  did  in  1774  was:  (1)  to  put  "old 
coin  in  a  state  of  perfection  hy  recoinin^'  the  defective 
pieces  and  making"  liiiht  coins  una\ailahlc  in  paynunts 
!h(  I'caftei':  ( '_' )  lo  limit  the  Kiial-tendta-  faculty  of  the 
siUer  money  theti  in  circuiation.  The  mint  \\as  still 
iipt'n,  and  anyhody  could  ha\e  siher  hullion  I'oincd  into 
money  of  full  wciyjit  and  full  Ici^a!  iendri'.  jiut  since 
siKcr  was  uiidcr\aluc(l  at  the  I'atio  "A'  1 .")  1  ."i.  nohodv 
would  take  it  to  the  mint.  Thus  all  the  conditions  of 
the  sini^lc  uold  standard  were  in  pi'actical  opeiation 
without  any  fixed  intention  of  I'ailiamt  nt  to  hring  it 
ahout.  or  any  know  Icd^^c  that  it  had  heen  doni'. 

it  was  noticed.  l)owc\(i\  that  'he  inconMiiic  ncc  s  of  a 
^hiftiiii^'  i';iti(t  ha<l  disappeared.  Tjicrc  was  pl(ni\'  of 
Li'old  money  foi'  laruc  transactions  and  of  siKcr  monev 
\'i>v  small  ones.  AithcMiuh  tii'  siKci"  coins  were  dc- 
lici(  lit  in  weight,  thcv  answered  tin  purpose  s  of  small 
ilianLtc.  After  the  experience  of  a  (|uai'tcr  of  a  cen- 
liiry.  I'ai'iiamt  nt  and  |)eoplt  v.'.yr  com  inccil  that  the  .\ct 
of  177  ^.  although  adopted  as  a  temporary  ?ucasure, 
oiil;Ii1  to  he  made  pi  I'manetil.  .\ccordin;4ly  it  was 
iikmIc  so  ii\   I7!M>. 

^  (  t  it  was  not  until  ISlti  ih;d  the  true  |  liIlos()ph\'  id' 
the  sfip  w;is  w<il  enough  iiiidirstood  to  Mcnit  its  en- 
actment into  a  settled  law.       In  thai  \;ai-  it   wasenacteil 


".+ 


M(»\l;^     A\l)   1{A\KI\(; 


<|>--'l  t  H.  o,,|.|  c-oiM  ..(•  tiK.  renin.,  whc,  of  r„ll  .vci.-ht 

.^HouM  he  i  nil  K,,.alU.n.ln-  and  should  Ik.  .oincdn^^^^ 
Pnvac  p.-rsons  tn  any  an.onnt.  and  thai  s|h,,.  ,,,in 
■si'"uhi  not  Ih.  !.,uJ  undn-  lor  n.on-  than  lOs.  in  one 
l'-\vnK  nt.  ..nd  shonld  h,-  .oin.d  onlv  on  oonnnnrnt  -u- 
;•''''''^•^,.KhonldlK■^•dncvd,..^v,.i.ht.;,H■rcv.nt.     This 

i-v.  wind,  .stahhshnl  th.  sinok.  .old  standard,  rcn.ains 
in  toi'ci'  to  thc'  present  day. 

J^--''''^tohMlK.sino.;daro.oodror!nnrorK,,o.h,nd 

o  hinnd.r  upon  or  have,  thrnst  npon  h.r  , institu- 

^">ns  uhu.h  oth.r  n,untri..s  an,UMv  oulv' after  nuu-h 
->"sn<>us  Hlor,  „„,  ,,,,,,aps  revolution."  l^.side.  the 
Kold  standard  a  ureal  many  ,.xcvlk,,t  iV.atuns  of  ...ov- 
enmu.nt  the.  dual  houses  or  IVuhauKn..  .h.  nspon- 
-l>.l.ty.dthe.(;ah,n,.tlothe.ConMnons.r..puhhe-an'ov- 

";'7"'  ;'"''•■•''-'•'''•'-'  •"'•''nionare-hy.e.t...u.i,hMK. 
(■it'.d  on  this  poiiil. 

•'•iyl/////,v,v.  Tlu.  key  to  !h..  nnderstandin...  of  the 
com|.le.x  pn,hK,,s  o,  ,h,.  ..and  irds  i.  .  He.ar  ..one-e.ption 
""  "iin',n.orn.i„auv  ,.u.d  oflh..  Inllu-ne,.  of  the 
"""ts  upon  values  of, he  pr-e.-onsnutals.  .V  unni  is  a 
''  ,  ,  ^^■'"■'■•'  *•*■'•'•••'"  '•'  'i"i<*'  -in.nlilies  of  th-.  previous 
"'y'^'l^  ;;••<•  stamped  with  a  deviee  or  inscTiption.  indi- 
<'^"'"i,- the  ..xaet,,uantily  of  metal  in  them.  .\  ,  hefor.. 
"'•"""•"■''•    "-   •■••"•li'-t    inse-ription^    .ere    literal    stat,- 

';"'";';''""■"'■'-''*"'■""•  ""■'••'I  ••""laiiud  d.ivm-the 

'■'■'-''''  '""""'  ^^'-'^  ••'  l"""id  of  silver,  the  Famhsh 
I-""v.n  pennyuei^h,  ..r.,K,r.  "I  he  sole  runel,.:;,  ..f 
""■."""';^-''^'"i'"  ""  "letal  In.oa  ,orm  mor,.  eon- 
^";","'  ';"•  '•"■'•"'•"-".  II  .(r.el.d  the  v.lne  of  the 
''"'''^""'>   ^'■'■^"•^'•^"'--'"npinu.inereasedlh.irnlii,. 

'■    "^  V'"'''"''""-*^""'  '•'■•^^'••1^'-'  add, ll.nal 
dm, and  for  tli(.m. 

'''''"1""""'^  ""•••''^  ''■•i^'M  Miarkel   v-dueexaelK    the 


AOLI'I'ION   Ol'    IMir.  STANDAUl)  OF  VAI.I  1.       r,r, 


line  as  aiiv  otlic-  coiruuHimts 


itii 


aiut 


11 


ns  mar 


ket 


value 


llia-tuates   iccoi-dinu'  to  ti.c  laws  ol"  sup])!)'  and  dcniand. 
\\'luii  tlicre  is  oidv  one  nutal  in  use  as  money 


the  11 


uc- 


!l    I 


ts  market  value  can 
)th 


hv  measured  only  by 
Th 


Illation^ 

IIk'  rise  and  fall  of  priees  oT  other  tlini<>s.  |  |r;  name 
•■dollar;'  'iMunid  sterling/"  ■'i'rane/'  -mark."  ete.,  are 
simplv  terms  in(lieatin<4'  weight,  not  value.  The  name 
•dollar"  tor  example  is  merely  another  name  I'or  a  eer- 
tain  definite  weight  of  o(,ld.  i.  c.  -J.'i.-J-J  orains  of  pure 
nold.  A  eonfusion  of  thought  arises  heeause  the  values 
(d'  everythinj^-  else  ai'e  indieated  by  eomi)aiison  with  the 
dollar  ol'  gold,  r.eeausc  tlu-  amount  of  -^old  i.i  the  dol- 
lai'  nevei-  .halves  ixeept  In  le.uislatix  <•  enaetment.  peo- 
ple fome  U)  tnink  of  the  \alue  ol'  ,!^'old  as  heino'  iixrd 
and  unehangino'.  In  a  later  chapter  on  the  relation  he- 
twicn  oold  and  priees.  we  shall  work  out  this  idea  more 
(.xhaustixily. 

(i-l-.  Liual  tciKhr.  In  the  Middle  .\gcs.  wlun  there 
Wire  a  ;;r<al  \arittv  of  coinages  in  concurrent  cireida- 
tion.  it  was  ni'cessary  that  there  shonld  hi'  some  under- 
-.tanding  as  to  the  relative  \alues  of  this  heterogenous 
coinage.  .\eco!'(lingly  thi'  duty  was  imposed  upon  the 
uoxirnnunt  (d'  preserihing  the  \alue  of  all  <  Iher  coins 
111  t(  rms  of  some  one  partieulai-  donu'slic  coin.  These 
roval  proclamations  ol'  tlu  value  of  coins  really  had  a 
lorce  of  legal  tender  enactmeids.  heeause  a  creditor  was 
'•■.iiipelled  l)V  courts  to  !-ecti\f  any  of  these  coins  at  ds 
l„,>trd  \alue.  Legal  tender  means  any  medium  of  ex- 
change which  m:iy  he  ten  !(  red  in  paxinent  of  deht.  and 
\Uiieli  must  lie  rec<i\c.l  oy  the  creditor  whether  he  is 
willing  or  not. 

It  was  ol)v'r\cd  early  that  there  was  a  tendei.cy 
lor  certain  -'asses  of  coins  at  certain  limes  to  disappear 
ir,.ni  eii     dation.     Thev  sure  t  itlur  hoarded  or  melted 


r>(i 


-MoM;^    AM)   |{.\\KI\(; 


;'P   f'"'"^^'"'ilH'.Kn.ur..u.t,nvor;,..vdrvnr|>latror 
I'^'y^^  •■■•;• -^i-H.<l.      In  nnkM- to  p,vu„t  this  the  mints 

*;yM''^>'tivrr.huvdth<.anH.n,tornH.talin  th.c.^^^ 
^'tt^;".l.tc<l  tn  rhcrk  thc^  Icn.k-.Ky  hy  hnvs  prohibiti,,..  ev- 

P'"-tnii4'  or  MKitinu.  or  the-  c-oins.     Onlv  the  fonmror 

tlHse  nic.^„ivs  was  rllieacinus  in  cheeking  these  tend- 

^-nnes.      liHore.  h<.^^e^e,•.   the  .•o„.tant   alterin-  of  the 

n.inaoe  ui(hiee<l  n.vat  e(.nriisiM,i  i,,  trade. 

<;.->.   ///>/o/7/  o/  roina::r  In   the  Cnihd  Sfatfs.-Thv 

l).stnryo|MheeniMa.enr.ohlaM.l.,!ve,.inthel',nte,I 

^•^'tes.soneorth..  Minst    mst  n.et  ive  ilh.st  rat  ions  of  the  I 

Jaws  wh.eh  uovern  the  tinetnations  „.   .ah,e  oC  th.  pre-  I 

-.ns  nntals.     The  (ir.t   se<.,H.tary  of  the  treasnrv  'va^  I 

-  '■■^••""I<T   Ilannlto,,.  an.i  he  was  the  statesman"  upon  ' 

"'"""''V^''  "''■'''">  •''■^•'•-f'Hoaplanlnran.on. 
.tary  an<l   ha., km-  svsi,.,,   for  th,.   new  eo„ntrv       'i    le 

"'^:<l"""  "f  rx.han-e  i„  e.renlatl,.,,  at  that  ti'n.e  wa^ 
•  "■'•'^•M'.''!!,v  Spanish  an.l  Kn^hsh  ..K  er  eoins.  ,„■  paper 
;'"";;■>  "'"'-•"''"■i.s.  The  p„u..r.iK.n  toC-on.,!ess 
"'.  ""  ^""-^'''"l-n  of  reuuh.finn  thr  rah.e  of  Coreion 
«""is  uas  most  nnpoHant  at  that  time  h-eause  of  the 
Ai-reat  variety  I„  .-irenkation.  It  nas  nee.ssarv  to  have 
-;nie  anthonlall^..  vahiation  In  onh.-  that  pavments 
""-'''  '-•"■"I'  ^^itlHHit  n-imrinoth.  partus  to  eomr  to 
.•li^rcenu  nt  as  lo  the  preeisr  nirans  of  pavmc  nt 

'•"i/wrv/..//o„/.sv7.v//o,.o/r/.  /.--../.     'it  was  part  of 

tlic- pkn,  of  1 1;nniIlon  to  .stahhsh  an  (  •ml,  ,1  Stat,  s  mint 
■so  that   th,   .   .m.i.vmi.hl  he  snpph.  ,1  u  1th  an  a.h  .mat." 

'"""""'    '"■    ''"""1    States  eoiMs   in    the   shortest    possible 

'"'"■•  ••""!  I!'"^ -•  .■|^^.■.y  uith  the  eonCnsioM  of  th,.  mis.rl- 
''";-'<s  eon,;,,,..  II,.  thought  it  n-nssarv!oeoir,  hoth 
,U"l.i.UMlsih,.rinor.krthat  this  pnrpos<.  ,niokt  he  eo.,- 
^"""'■'•""'  '-'^  '•■'P""^-  •-   I  — 'M<'.      If.'  fiv..l  upon   the 


ratio  o('  i:»  to  I  as 


ii'I"'"'^i"iatin,M  most  e|,K,  K   d,,.  „,,,,.. 


i:\()i.T"rioN  or  Tin:  s'iandahd  op  valfk    r 


■?*•■ 


3 


k(.  t  \  allies  of  tlic  metals  at  thai  time.  The  unit  of  vahie, 
the  dollar,  was  ()  vitd  upon  heeaiise  of  the  familiarity 
of  the  j)e()|)le  witli  the  Spanish  dollar,  and  tiieir  custom 
of  <|Uotin'>'  prices  in  that  standard.  The  opening;'  of  tiie 
mints  to  the  coinau^e  of  silver  and  Li'old  at  the  ratio  1.') 
to  1  .iieant  the  free  coinage  ot'  hotli  metals.  T'iie  mint 
stood  ready  to  accept  <ra\(l  and  silver,  to  convert  them 
into  coins,  and  return  tiie:,e  coins  to  the  person  i)rin<>ino- 
the  metal,  char^in^'  him  a  \ei'}  small  fee  for  tl>e  alloys 
used  to  hardrii  the  coins. 

(•T  1 11(1  Hide//  of  the  ratio  (iiid  ils  cflUls. — The  plan 
(lid  not  work  ■  iit  as  Hamilton  had  intended.  In  the 
Mrst  placi'  the  ratio  of  1.)  to  1  had  ceased  to  re|)i'esent 
ihe  market  ratio,  when  the  mint  was  finally  I'cady  for 
coina<,e  al  out  two  oi-  three  years  later.  According'  to 
'he  u'reat  Kuropean  authority  on  the  market  values  of 
the  ,irecious  metals.  Soethecr.  the  actual  market  I'atios 
were  as  follows:  l.)..'J7  to  1  in  17!>1-,  1 ')..">•')  to  1  in  17i>.'). 
l.).*;.")  to  1  in  17'»<;.  l.").4.|  to  1  in  17!>7,  I.").")lt  to  1  in 
17!>H.  1.").74  to  I  in  17i>'.>,  l.).tlK  to  1  in  IHOO.  and  l.).4() 
to  1  in  IHOl.  Till  se  chan;.ies  in  the  market  ratio  indi- 
cated that  the  tciKlcncy  of  siher  with.  I'cspi'ct  toxoid  was 
downward. 

I'nder  these  circumstances  noliody  would  he  so  fool- 
ish as  to  take  j.'')l(i  to  the  mint  to  he  coined.  It  was 
!iiu(!  more  pi'o.i  ,d)li'  to  take  that  <4'old  and  pin-i'hasc 
siUer  \'.ith  it  in  the  market,  and  tlu'n  to  take  the 
silvir  to  the  mint  and  have  it  coined  into  uiore  dollars 
than  the  !4i>ld  would  jia\e  made,  and  each  eajiahh  of 
purchasino-  the  same  amount  of  conimodities  as  a  ^old 
dollar.  To  make  this  ])roposition  as  cleai-  as  possihlc, 
li  I  us  tidxc  a  concrete  examjilc. 

Suppose  a  dcalir  in  hrdlion  has  one  pound  of  ^'old. 
it   he  wishes  to  convert  it   into  a  means  of  |)aymcnt.  he 


.')S 


•MONKV    VM)  IJANKINc; 


till 


may  do  one  ol'  two  tl.inus;  first,  1r.  may  take  it  to  tiic 
mint  ami  liavc  it  coiiitd  into  approxiiiiattly  -JM)  dollars: 
second,  he  may  vwhiuv^v  the  o(,|,l  hulli,,,,  for  silver  bul- 
lion in  the  Kuropean  market.      I  f  the  market  ratio  hap- 
pens to  he  ir,l  .  at  this  time,  he  will  ^et  i,,  exehan-e  1.51  .. 
pounds  of  silver.      This  silver  he  may  take  to  the  mint 
and  have  it  eoined  into  approximately  •_>(;()  dollars,  eaeh 
or  whieh  is  just  as  u,„„l  as  any  no|,l  a,,!!;,,.  f„i.  tl,e  j„„.. 
pose  of  trade.      ( 'nder  these  eireumstanees,  whv  should 
anybody  take  ,<.„1,1  to  the  mint  when  there  were  always 
dealers  ^^hn  ^^vvc  eaoe,-  to  make  the  profit  whieh  eould 
Ik-  had  by  purehasino-  his  u,,l,l  h„||ioM  for  silver  dollars, 
t'xportino-  the  o,.],!  t„  i,,,,.  c,,,,,-^,,  ^:|^.^.,._  .,,j^,  ^j^^^^^  j^.^^._ 

in-  the  imported  silver  eoined  in  order  to  buv  more  <.(,hl 
'"'Ihon^  Here  we  have  an  endless  ehain,  automaticvdiv 
causinu-  an  exj^ort  of  n,,l,l  and  an  import  of  silver.  I  'n*- 
der  these  eireumstanees  no  ^,,1,1  „as  eoined,  „f  t,„„.se. 

<iH.  Disappcarainr  o/'  the  .sihrr  ^/o//a/-.v.- ^Hamilton's 
idea  of  supplying  this  new  eountrv  with  eoins  of  its  own 
i.iintaoe  was  further  frustrated  by  another  peeuliar  con- 
dition. It  was  very  s<.<.n  notieed  that  in  spite  of  the  coin- 
age o(  siher  dollars  at  the  mint  thev  did  not  seem  to  re- 
ii'aiM  m  c-ireulation  for  Ion-.  Instead  the  old  Spanish 
<;oinane  eontinued  to  be  the  eurrent  monev.  Of  these 
.Spanish  and  other  foreio-,,  (,,ins,  ,,nlv  those  whieh  were 
H1PIH<1  and  mutilate.l  Mere  eurrenl.  Perfeet  eoins 
were  either  mm.,,  ,-edueed  to  this  same  eonditio,,  or  disap- 

''^"7;"''""'""'^-"''''i""-  'I'lu' Spanish  silver  eoms  were 
a'  this  ti,„e  full  K..,,l  lender  alo„o  ^,,11.  the  Tnited 
Myites  ...„,s.  I„  ,|.,i,  ,„,,,,,,,  ,,„dition  Ihev  we.'e 
^'';4-htlv  heavier  than  Ihe  An,e,-iean  eoni.      Hnth"  in  this 

'•'"7*7— •'""-  W.S.Indies,  uilh.hnm  at  thai  ti,„e 

;:•■'">•'•'  ve,-y  extensive  t,-a,h..  both  eoins  pasMul  at  their 
'^•'•^-alue  without  anvd,MTi„„„ation       SIhwv.I  t,ade,-s 


i.\()!.i  rio.N  OF  rm.  siandaud  oi-  \Ai.ri: 


m- 


I 


Inuntl,  however,  tliat  they  could  make  a  |)rotil:  exportiiin- 
the  new  Ignited  Stales  silver  dollai's.  e\ehani^iii<^-  tlieiii 
ill  the  West  Indies  i'or  tlie  hea\  ier  Spanish  dollars,  nielt- 
iiio-  these  liea\ier  dollars  into  hullioii.  itnn^in^'  the  liUi- 
lioii  to  the  Ciiited  Stales  and  ha\  iii^'  it  eoined  into  more 
than  the  oi'i^inal  niimher  ol'  dollars. 

When  It  was  discovered  that  the  eoinaoe  of  silver 
dollars  was  simi)ly  adding-  to  the  profit  ol'  hiillion 
(k-ders  instead  of  sni)plyin,u-  the  country  w  ith  currency. 
President  JeHVrson  suspended  the  coina«ie  of  the  siher 
ilollar  in  IHO*!.  'I'his  unsatisfactory  state  of  the  metallic 
ciirreney  of  the  country  was  not  serious  heeause  of  the 
almost  imixersal  use  of  j)aper  money  at  that  time. 


I'l  III  IMMiSS    (ir     M  \I1KIT     Ii\Tl(l     HriUIKN     del  I)    AM)    Slivill.' 

^,,ll■.  Uatiii.     Year.  Italio.      Viar.  Ratio. 


i.).n 

15.7!) 


1.>..>J 


'^        I -111. 

l-ii.) 

*  iMMi 

iMiT lj.l;{ 

4         1-(W Ki.OS 

I        ISO!) !.>.!)(! 

i        I- 1  (I l.VTT 

l-ll 1")..".;! 

i-i." Hi. II 

|sl;{ iti..',-, 

jxU Ij.ol 

l-l.> l."...'() 

l>lti 1.5. -'8 

i-«i7 i.vn 

isiH l.j.:ij 

isii) i:,.:« 

|s.>() lj.(i.' 

Is.>l l.-,.!)j 

IS.'.' i.vso 

|H.':{ i.-,.sv 

Kn ij.s.' 

!».'.•) I,V*(» 

is.'i; i,-,.7(i 

ls.'7 l.>.7l 

is.'rt 
to 

ix.'<).  .  . .  rv7s 

I  C'lmipil.'il  li\    tlu    Dm 


is;$(i. 

isil . 

iKi.'. 

is:t;{. 

IKU. 


1.V8-3 
1.>.7.' 
l,"..7:i 
1  ■,  !i;i 
l.-..T.{ 


1S:{.; I.).N) 

is;{() i"..7.' 

IHU7 I  "..Si 

isss i,-,.s,, 

|s;i!) 
to 

I-' ID I. ■..(!.' 

Isu      1  "..7il 

lsl.> 1  VS7 

isi:} I  ■..!•;! 

ISU li.K'. 

IHIJ IV!!.' 

ISKI I.!»ll 

isn l.i.hO 

ISIH l.).H,> 

ISl!) 15.78 

ls.',() l.i.70 

iH,-.i \r,.i(> 

IH.).' 1.5.j<» 

lH.-.:{ iv!;i 

1S.U...  iv.i:! 

lH.'.j...  .  \;.:\H 

la-io. .  . .  i,',.:w 

is;,7  . .  l.V.'7 


lH,Jrt l.'i.nfi 

]>•:)<) i:..i'i 

ISliO 1  '>..".) 

Isijl IV.'ii 

ls(i.' i.».;!.< 

iMi;{ 1.J.S7 

isill 1.VH7 

ih(i.; ivn 

is(it> i;,  i,i 

lb<>7 l.»..i7 

lS(iS 1  v.")!! 

iHiiSj 1  ■,  i;(i 

1S70 l.)..W 

\>:\ i"...'.7 

IsTJ l."i.(i,i 

|s7:{ 1,>.!».' 

ls7t 1().17 

l!-T.> Ki.fiJ 

ls7<i 17  77 

1H77 17..'.' 

187H 17.!).' 

1879 18.H9 

IHHO....  Is  (It 

1881 l->  .'1 

ISS.' IS.iJ 

lss:i 18.(i5 

1H8^...  lM.(i3 

188,'. 1!).3!) 

188(i .'0.7;{ 


til.    lititecl  .'■■ittte.s  Mint. 


i 


60 


•M('M;\-    AM)   JJANKiXc 


1  .SSM . 

lh!):{. 


it.iii 


I  eji  r. 


-M.l.i      ls;i|. 
-'l.!)U      I  >!).-,. 


l!).i; 


1W)7 


-':{.7J     I 
-'(j.l9      1 


^:>i 

h!»S 

:{ 1 . 

;{.-..( 

h!)i» 

lii.: 

!)00 

3.5.: 

Katio.  ^car 

•  '.i.'.-'ii'i  i)i(i|. 

-'0  \nin. 

I't  i'M>:>. 


III. 


Kalii 


.  .   3+.()H 

.  :i:>.7o 
.  :io.,u 


\\;is,  thertf 


("///.L' 


<   "f  ratio  to  /6\-/.— The 


.11  th 


ore.  oil  ;i  stiift  silver  I 
(i  I 


monetai-v  svsttu 


)a.si.s  diiriiio'  I  his  nerio,!. 
'^\i^nld  iK.v.no-  l,,,n  ,.x-,.ort.,!.  hoanK.I  or  ,l,\ertcd 


into  the-  arts.      In  is.'U.  C 


L'( 


Ivtl 


I*-'  e'cnditioM.  irdiict'd  tli 


•"•^■IVSS.  Ml  ;,,|  attfiiipt  I, 


)  rtiii- 


1  roiii  24.7.)  grains  to  'J,'}. 22 


e  wc'iulit  ,,[■  ti 


If  m 


.1(1 


(to! 


rt'j)resciiti(I  a  ratio  of  api 


,S-'''";llllS    (.r    piHT    n(,i,|.        'I'l 


II' 


nieicia 


1  rat 


niijit  rat 


ncaily   conrcl.    j 
could  I)a\c 


'o  m  \W.n  was  1.3.T.'i  to  ], 


)f<'\iniat(ly  K;  to  1.      Ti 


R'  coni- 


'o  iMitiJ  I'ortv  vcai-s  lat 


(T, 


io\\  ex  CIV 
•ttl 


"oi-  did  it  nacli  iln 
^1   was  pi'ohahK-  af 


;is   aii\-   ari)iti 


It 


w 


Hfii  settled  ii|ioii 
^^('11.   ill    fact,   ii 


aiy   ratio   wjiicl, 


■liiiiietallivnr'  li„xv  iii,.fr<ctii;d 


'  a  ^ul)S!(jiiciit  chapter  on 


estahlisli   li 


y  enaetiiKiit    in 


;>n\-  attempt  must  \)v  \i 


value  hetuccn  t\\()  sue! 


a   siiinif  coimtrv   a    rat 


lo   o 


\\liieh  ha\('  uni\-i-rsal  titilit 


I  (•on!m..ditiVs  as  o-,,|d  and  sil 


\'er, 


as  o()l,|  ^vas  d 


i'i\eii  out  ol'  (' 


too  low,  so  after  IH.'U  sih 


•■""'  a  world  market.      Just 
"I'latioii  wJKi,  the  rat 


lo  was 


was  too  hii'Ii. 


^\as  drum  out    l)cfanM'  It 


"t  was  at  the  mint,  and  tl 


'ilvrr  was  worth   n 


IO!-r    ;|. 


nil 


llioii   tl 


lan 


a  i>'o 


Id  iiasis.      In  IH.'M  the  rat 


If  eoiiiitry  soon   JMiind  its.lf 


on 


1.  hut    the  diil 


lo  was  eli;in^<(|  to  l.").!tS  t 


() 


tVct. 


'■••<"ee  was  so  sJiM-|,t  that  it  |,a,l  little. .-f- 


70.    Lc^ol  t(  //(/(/•  ,,rl 


(.old 


•v  ('rtiit(\'J 


j  la  per  .s/,7;/^/^/,v/___ 


'":'"'"""  •""'"•'li-l.'n.dard,iiitllth,.|ro:.,|  tender 


»<-ts  of   IHO-J    is<;;j.      The   (jrst    of   ll 


I'el 


lese 


icls. 


"'iary.  iSd-j.  .mt) 


liun-iiitei 


est 


passed   in 
"'ii/<(l  tile  issue  ,,f  .S|.-,o.o()(),,)(M)  of 


anno-    ( 'nited    .Slat 


es    Hole 


pity 


i:\()U  rioN  or  I'lii:  siandaud  of  vai.i'i: 


liciiri.  T.  These  iidIcs  were  to  he  rteei'  al)'e  I'or  all  dues  lo 
the  (.overnnient  and  to  he  leyal  tender  I'or  all  dehls. 
|)iil)Iie  and  i)rivate,  within  the  Tnited  States.  They 
were,  Inrthei'niore,  ixehan<^eahle  I'or  the  (>  ))er  eent  twen- 
ty-vear  honds  of  the  Tnited  States  at  the  option  of  the 

holder. 

The  first  hill  was  followed  six  months  later  by  a  second 
measure  authori/.in<^-  si.j().()()().()()0  more  notes,  and  in 
,)aiiuar\.  ISC.:},  the  total  was  inereased  to  .i<4()0.()()(),()00. 
'I'hus  there  was  injected  into  the  circulating-  medium  of 
the  country  s  tOO.OOO.OOO  of  promissory  notes,  the  early 
i'Klemi)tion  of  w  Iiieh  at  least  dei)en(led  on  the  success  of 
the  Federal  army  in  the  field  and  the  reestahlishment  of 
]n'ace  and  ordei'.  In  accordance  with  (ireshani's  Law, 
i^old  entirelv  disapi)eared  from  circulation  after  the  first 
hill  was  passed,  and  pi'ices  were  soon  expi-essed  entirely 
ill  t'^rms  of  the  pai)er  standard.  The  situation  was 
liirther  complicated  in  July,  IHC.'J,  hy  the  repeal  of  the 
|M(>\ision  for  Ihe  exchann'c  of  the  notes  into  United 
Stall's  Itonds.  and  hefore  the  end  of  lH(i4  ^'old  was 
(juoted  at  280  in  the  \ew  ^'ork  market.  In  otlier 
\^o!-(ls.  the  "urccnhacks""  were  \\<)rth  hut  .'}.)  cents  on  the 
ddllar.  It  is  ohvious  that  tlu'  country  was  no  lon^'cr  on 
a  u'old  hasis.  The  unit  of  value  was  now  the  Ciovern- 
iM(  nl's  promise  to  ])ay  Si  in  nold,  a  unit  which  fluctn- 
ated  with  the  fortunes  of  war. 

71.  Single  i^oUJ  sldudard  after  1S7!). — This  condition 
lasted  louij-  after  the  conclusion  of  the  war,  l)ut  naturallx' 
as  it  hecame  i\  ideiit  that  the  nation  was  to  endure  and 
the  ( io\crnment  linancts  impro\ed,  the  di\c'r<4-ence  he- 
l\\((n  u'old  and  tlu'  ])a])ei'  standard  u'l-adually  decreased 
nnlil  it  was  completely  destroyed  when  in  .Ianuai-y.  1H7-K 
tlu  treasury  idlVrcd  to  redeem  its  le^al  temler  notes 
I!!   !H7;j  nn  act  \\:is  piisscd  wliich  made  oold  the  sole  Ic- 


et 


•MiiM;V   AM)  ll.WKiv,: 


„;„::,1 :;!:;.:;,: -'^ "«-' ^'y  ^"'-'--i  <'>■  «i.c.  .■,.,<.„.,» 

Iri   IK7K  ll„.  f,v,,s,„-y  ,v„s  m,ll,„ri,,.l  I.,  ,,„rd,.sc.  sil- 
■^  Mi.r,„.-,„    Wt  .„ll,„™..,l  ,iK,  ,„„,|,„,  „,  ,iK,,  I, 

"     II'   <>'„,,,.,,,„.,.  Hl.,rt„r  the. Silvc,.  I>,„.tv(„c.rt 

.•■  I  o.„  ,„„,..,.,,,, ,,,,„„, ,,,,.,„,,;,, 

-■    l:l'''l""".,«"Nll.asa.M..in..nUK-si,,,,k.|cJ 

tli'^  iTM,„,|,t,„„  „f  ,|,,eic  ,,aynu„ts  ,„  ,ht.>. 

n      ••         ,  •      'M    i.mm;  ,1(1  act   was   nnssf-r]   on 

?'■"" ''V''''':'>' '-'•'■''•■'■  "-■•■■n.v  tiK- r„i,     si ' 

"-S  t„  I,..  ,1,  ,„,,  |„,„,,,,,.   ,1,^,  ^,,.,  _|^_|  >"  t  - 

-nM„.i,  as  .1,,.  I.„„ls  ,1,..  (:„v,,,M,H.nt  ,„',,.„ t'  ,„    , 
V,...  a„.l  «,.,.n,l,a,.|<.  a.  pa,-  „iH,  ,«„,,,  „,  |,av  ,e, 

1  ■   .yiM.|i.,,H„ii,v..Uyp„,vi,i„r.,Mi„.i,.!..,i„,;  ;^^^^ 

"--■"■I  "»l"- ^  "P".,  the.  S«.vctarv  ,,,■  ,|K.  |,,av 
;,;•■  l-«^;i  ^l-.l.-.nl   «a,  a  ,1„„,„,  ,.,„,  „„,,,  „,',«;' 


i:\oi.i  rioN  OF  'I'm:  standaud  or  \  \i,n:   (j; 


silver:  Irom  lH.*}t  until  1H()2  it  was  o()|(|.  Tlifn  came 
the  Icyal  tender  ;!ets,  and  yreenhacks  heeanie  the  actual 
standard,  to  eontiniic  until  I87!>.  In  IST.'J  ^old  was 
made  the  siuf^le  le,ual  standard:  and  iVdin  the  resump- 
tion of  specie  payment  in  1871)  it  has  l)ccii  the  actual 
standard  as  well. 


MICROCOPY    RESOLUTION    TEST    CHART 

ANSI  and  ISO  TEST  CHART  No    2 


1.0 

If  us 

*^             4 

1  ^'^ 

22 

I.I 

2.0 

1.8 

1.25 

1.4 

1.6 

A     APPLIED  IM/1GE    he 


CIIAPTKU   VI 

STANDAUl)  Ol'   DF.I  r.HRF.l)   PAYMENTS 

7i.  Defects  of  onld.  The  next  function  of  money 
to  he  considcrrd  is  its  use  as  a  statidard  of  (IcftTird  pay- 
ments. Obviously  this  dilfers  from  its  futietion  as'a 
standard  of  value  only  because  it  introduces  tiie  time 
I  lement. 

For  this  |)ur])ose,  also.  <rold  is  a  defective  standard. 
l>ut  it  is  hy  far  the  best  that  is  krunvn.  c;,,!,!  is  ,hirable. 
Once  mined,  it  is  added  to  the  pnxhictions  of  the  |)ast. 
to  remain  always  a  part  of  the  world's  supi)ly.  For 
tins  reason  the  amount  mined  in  any  one  \-ear  cannot 
l>ear  ]ar<.'e  eiiouol,  proportion  to  the  total  amount  in 
'■xistcjice  to  cause  <>reat  changes  in  its  \alue.  K\en  with 
tiie  j)resent  annual  production  of  over  .$4.)().()()(),()(H) 
the  amount  in  existence  is  so  iai-oc  that  its  \alue  is  much 
more  stable  than  anything-  v]sv  which  could  be  used  i'oi 
th(.'  j)ur))ose. 

Although  the  same  was  formerly  true  of  sii\er.  it- 
pi'oducfion  has  sn  nreatly  increased  during  the  last 
tlnrty  years  that  a  sinol,.  sJUcr  standai-d  ol'  deterred 
payments  woidd  be  xcry  unsatisfactory.  lUtwccn  IH7(i 
and  IH'.tl-  its  ydld  pne.'  fell  .*)()  per  edit.  C'hanncs  as 
xiohiit  as  this  wduld  nnt  ha\«  tak(  n  ;lare  had  not  silver 
bet  II  dciiKuicli/cd  in  tli(  I'nited  Slati  s  and  hail  not  the 
natmns  ol'  Kuiopc  aKd  diseardt.l  it  <Iuiiiih  th,.  l;,st  h.-df 
crnlury.  Tins  ^nat  chaniic  in  Ihf  value  (>{'  si|\(r  with 
res|)(c|   to  n(,|,|  s(  r\((l  to  discredit   il   as  a  standanl. 


i:....i.:  :•. 

■•]'■-'• : .' 


•  t         w  i  i  C 


STANDARD  OF  DKFKHRED  PAYMENTS 


65 


double  standard,  but  shall  reserve  that  subjeet  lor  more 
{•arel'ul  eoiisideratiou  in  a  subse(juent  chaj)ter.  In  the 
absenee  of  a  better,  we  are  therei'ore  forced  to  the  eon- 
elusion  tliat  gold  is  the  best  standard  for  deferred  pay- 
?iients. 

7.5.  Definition  of  deferred  paijmoits. — Deferred  pay- 
ments are  usually  the  result  of  eontraets.  When  we 
stop  to  consider  that  contracts  play  a  part  in  nearly  all 
business  transactions,  the  inij)ortance  of  the  subject  is 
a|)[)reciated.  Our  investments,  bank  deposits,  notes, 
currency,  in  fact,  a  lar^e  proportion  oC  our  wealth  con- 
sists oi'  conti'acts.  If  economic  prosj)erity  is  to  con- 
titiue.  these  contracts  must  i)e  enforced.  To  this  end 
the  Constitution  of  the  Tnited  States  declares  that  "no 
state  shall  ])ass  any  law  impairing  the  oblination  of  con- 
tracts." 

Althougli  the  ])rovision  ])revents  the  direct  impair- 
ment of  contracts,  the  same  end  may  be  accomplished 
indirectly  by  unwise  moiutary  laws.  Anything,  in  fact, 
that  causes  great  changes  in  prices  will  alter  the  elfect 
of  conti-acts.  Practically  all  contracts  are  payable  in 
tci'tns  of  dollar-,  and  some  of  them  I'un  for  long  pei'iods. 
In  order  to  securt'  jxrfect  justice  between  debtors  and 
creditoi's  it  is  lucessary  that  the  dollar  should  mean  the 
s.iiue  at  the  maturity  as  at  the  begininng  of  the  con- 
tract. 

Speaking  accurately,  this  is  impossible,  for  even  wlicn 
tile  contract  is  specifically  made  payable  in  gold,  the 
purchasing  powi  r  of  that  gold  ;il'tei-  ;i  jxriod  of  Mars 
liiav  liMxe  ejiaiiged  eo]\sider;d>lv.  ('oiitra<'ts  ])avable  in 
gold,  howcxcr.  ba\e  always  Ixtm  tln'  most  highlv  re- 
g.'U'ded.  beeauve  no  matter  how  distant  the  dale  ol'  ma- 
turity it  is  gen(  raiiy  Teil  tiial  tiie  \alue  ol  golii  will 
ap|)ro\intate  its  present  \alu»'.     'l"he  risk  that  it  will  be 

VII  — 


f)() 


MONEY  AM)  HANKING 


III! 


greater  or  kss  is  only  the  ordinary  business  risk  which 
every  husiiiess  man  must  take  and  for  which  he  must 
make  allowance  in  his  calculations. 

A  nrtat  many  contracts,  however,  are  payable  in  terms 
of  '•dollars,"  without  s])ecifyino-  the  kind  of  doHar  that 
is  meant.  While  the  statutes  define  a  dollar  as  '2li.'2'> 
•grains  of  |)ure  ^old.  yet  debts  may  be  le<rally  paid  by 
other  forms  of  dollars.  The  law  makes  certain  forms 
of  currency  lenal  tender  in  payment  of  debts.  The  sil- 
ver dollar  and  the  treasury  notes  are  lull  le^al  tender, 
(ireenbacks  are  full  le^al  tender.  National  bank  notes 
are  IcM-aJ  tende:-  in  payment  of  any  debt  to  a  iiational 
batdv  and  are  recei\  able  by  the  (Government  for  all  dues 
I  xcept  duties  on  imports.  Subsidiary  siher  is  le<4al  ten- 
di']\  but  for  c(inv(  iiicnce  sake  onlv  for  -Sjo  in  a  siimle 
))ayment. 

7<i.  K//'cct  of  h-o-al  tender  lnrcs.~So  lon^  as  all  the 
forms  of  currency  are  interchan<rcable  and  of  the  same 
value,  leo-al  tender  laws  have  no  particular  si<rniHcance, 
but  if  some  form  ol"  currency  is  depreciated  it  is  obvious 
that  no  creditor  will  care  to  receive  it  and  i  very  debtor 
will  want  to  i)ay  in  that  form  of  currency.  For  in- 
stance, wlnri  the  -rreenbacks  depreciated  to  ;{.)  cents  on 
the  dollar  in  ISC.l,  they  were  still  le^^al  tender  utdess 
oliierwise  sjxcitied  in  the  contract.  Xo,  dclitor  would 
think  of  |)ayin^'  his  debt  in  o(,ld  dollars  because  with 
.'{.')  |)cr  cent  of  that  amount  of  ^old  he  could  buy  dc- 
prcciahd  t>rcerd)acks  that  would  I'ully  satisfy  the  debt. 
77.  ('(nisliiiilitiiKilif//  of  Lc^nl  Tinder  Aetn.  -TIk 
rio-ht  of  the  (ioxcrnment  to  pass  the  Le^al  'I'ctider  Acts 
Mas  in  fact  declared  uriconstituti(;nal  by  the  Supreme 
{'•Mirt  because  it  violated  the  clause  of  the  Constitution 
■-..iirii  i;;rri,i.a  Tii<  iiii  ji.i  i  iriiciii  oj  u\v  vaJiditv  ol  con- 
tracts.    'I'his  decision  was  reversed,  however,  bv  a  sub- 


S'lANDARI)  OF  DEFKRUKI)   PAYMKNTS 


67 


sequent  Siij)iriHe  Court  wliicli  (kclarcd  the  statute  con- 


stitutional under  tlie   autliorit 


I)rovi(le  means  for  earrvino-  on  \\ 


y    o-ivrn  to   Congress  to 


ar. 


\V 


•uvjn<4'  the  question  of  eonstitutionahtv  of  lefj-al  ten- 


ler  acts,  it  niay  he  well  to  consider  Avheth 


er  under  anv 


he  gained 


( ireunistanees  tliere  is  any  advantage  to 
;i(l(hng  the  legal  tender  i'eature  to  the  various  forms  of 
circulating  media.  Does  the  medium  hecome  more  val- 
lia'nje  l)ecause  of  the  legal  tender  stamp ^  Ohviously, 
if  a  country  adojjts  the  gold  standard,  making  gold 
Irgal  tender,  it  increases  the  value  of  gold  somewhat 
iKcausc  it  increases  the  demand  for  it.  J?ut  this  is  hc- 
■•;!usc  gold  is  iRcded  as  a  medium  of  exchange.  The 
legal  tender  feature  adds  nothing  hecause  it  will  circu- 
late at  its  actual  metal  value.  AMicn  a  country  attaches 
tlir  legal  tender  stamj)  to  two  metals  we  have  already 
seen  that  the  chea])er  will  drive  out  the  dearer  and  that 
liie  chtaper  metal  will  also  circulate  at  its  metal  value. 

In  the  case  of  the  greenhacks  the  legal  tender  feature 
.i('led  nothing  to  their  circulating  ])owc'r,  as  is  shown  l)y 
the  fact  that  they  iluctuated  in  value  as  the  time  of 
tli«'ir  re(lemi)tion  seemed  early  or  remote.  The  legal 
tdider  featuie,  is,  therei'ore,  of  value  solely  to  the 
i!(l)tors,  who  can  take  advantage  of  laxity  of  their  con- 
tracts to  |)ay  their  dehts  in  (lei)reciated  currency  wlicn 
Miry  should  pay  in  the  standard  iik  tal.  It  adds  little, 
tlieret'ore.  to  the  circulating  power  of  the  medium  to 
which  it  is  attached,  and  what  little  it  does  add  reacts 
tn  the  a(l\antag<'  of  a  single  class. 

The  whole  jVn-  silver  agitation  was  an  attempt  to 
(liange  the  standard  hecause  it  w.is  helieved  that  in  re- 
ganl  to  its  use  as  a  standard  of  dilVrred  na.vments  u-old 
was  deCertivc.  It  is  a|)parent  that  it  is  to  the  advantage 
of  the  dehtor  class  to  have  a  standard  which  is  coii- 


^f 


68 


MONF.Y  AM)  BANKING 


iiii 

I 


stantly  (lci)irciatiiin-  in  comparison  with  fr-oods;  in  other 
Words,  that  ^oods  should  be  apparently  rising  in  value. 
78.  Debtor  claa.s  injured  by  an  appreciating  standard. 
—From  IHOO  to  18!)(>  there  was  a  large  debtor  class  in 
the  country  composed  of  farmers  who  had  gone  AVest 
and    purchased    land    on    mortgage.     These    farmers 
l)ought  the  land  agreeing  to  j)ay  a  certain  price  in  the 
future  and  a  certain  rate  of  interest  each  year.     This 
])rice  and  interest  rate  were  based  ujx)!!  the  value  of 
crops,  i)articularly  wheat,  which  in  the  early  70's  was 
worth  as  high  as  ^'1  per  bushel.     The  i)rice  of  wheat 
gradually  declined  until  in  1H1)4  it  was  worth  less  than 
.)()   cents  per  l)ushel.     The   farmers   found  themselves 
unable  to  meet  the  interest  payments,  much  less  to  pro- 
vide for  tiie  I)aying  off  of  the  principal.     Tlvy  were 
told  that  this  condition  was  due  to  the  appreciation  in 
the  value  of  gold  following  the  demonetization  of  silver 
in  IHT.'J.     They  were  also  told  that  if  silver  could  be  rc- 
nionetized,  that  is.  made  the  standard  of  value  alon<T  with 
gold,   that   the  (piantity  of  standartl  money   would  l)e 
doubled,  that   the   value  of  standard  money   wcndd  be 
reduced    one-half    and    the    value    of    evervthinLr    else 
doulded.      This  debtor  class  composed  the  backi)one  of 
the  Silver  j)arty  in   \Wi\.      Fortunatily  before  another 
election  was  held  the  (|uestiou  h.id  been  settled  to  the 
satisfaction  of  everybody  by  the  unexpected  increase  in 
the  production  of  gold. 


k 


CIIxVPTER  VII 

SUPPLY  AND  DEMAND   FN    RELATION  TO  MONEY 

79.  Price. — Tlure  is  a  ilistinctioti  between  the  use  of 
the  words  "vahie"  and  "price"  wliich  it  is  well  to  under- 
stand clearly.  A'alue  is  the  expression  of  a  ratio  of 
importance  between  two  commodities.  If,  for  example, 
one  wishes  to  express  his  estimate  of  the  worth  of  a  pair 
of  shoes  it  is  necessary  tr)  make  a  comparison  with  some 
other  commodity.  Thus  the  value  of  a  pair  of  shoes 
may  be  expressed  as  e(iual  to  two  hats,  or  the  ratio  ex- 
j)ressed  is  one  to  two. 

Price  is  a  ratio  expressing  a  comparison  of  value,  but 
one  of  the  terms  of  the  ratio  is  money.  The  use  of  a 
standard  of  value  which  is  familiar  to  everybody 
<  iiormously  simplifies  the  expression  of  values.  In  order 
that  price  may  have  a  clear  and  definite  meaning  it  is 
necessary  that  the  money  standard  fluctuate  as  little  as 
possible.  If,  however,  there  is  a  change  in  the  value  of 
the  standard,  it  alters  the  real  meaning  of  ( vcrv  (pioted 
price. 

Tliut  the  prices  of  goods  depend  quite  as  imicli  iijuiii  tin-  value 
lit'  money  as  upon  the  value  of  ilie  j^oods  tlieinsolves,  is  a  truth 
that  the  reader  must  fully  ^ra>}).  It  may  he  a  little  pu/zlin^'  at 
(Ir-t.  for  it  is  natural  to  think  of  monev  as  a  Hxfd  and  stal)le 
lliirii!-.  "ith  respect  to  which  o*l'er  thin<Ts  fhietuatc.  To  iii.inv 
men  tiie  idia  that  money  ehan^is  iu  \alue  is  as  novel  when  tir^t 
presented  a-;  the  notion   that   the  ocean  chanj^es   its  level,      '['he 


ison    1 


<<l       i:ii^     Hi!--.!  |ij)l  I  lieu>JlMI      «HII      ir^aio      111     lllr      \alUe      <ll 


noiiev  lies  in  the  fact  that  men  th'    '.  of  priir  us  hein^-  identical 


sy 


',»« 


ro 


:\I()NEY  AM)  B  \XKL\G 


«itli  \aiiu'.  and  miicc  Hit  ■priru""  of  <^o\d  ( aiid  of  silver  in  a 
ciiuiifrv  win  re  it  is  irecly  cuinnl  into  iin)iK\- )  ncwr  ciiani'cs,  it 
i>  asMinicd  that  tlu  value  nf  ^old  i>  uiichaii>4ini;'.  'I'iie  eoiiinioii 
l)elief  in  tlie  stability  of  nioiiev  i^  anali)0()u>  to  the  illii>i()ii  e\i>t- 
in<^-  anion..'  primitive  people  uith  ivnard  to  the  Milar  sv>teni. 
Tliev  think  the  earth  is  >tationar\'.  It  is  their  view  point,  and 
all  I'hann-o  (n,  the  >ereen  of  the  tiriiiaineiit  m.ih  to  th. m  to  reflect 
ehaiiu'cs  in  the  heavens,  not  in  the  petition  of  the  earth.  'J'he 
analo^'V,  like  all  analogies,  i>  imperfect,  hut  it  is  su<<-gestive. 
'I'lie  fact  that  chan<^es  in  ])rice  reflect  chan<res  in  the  value  of 
nioiiev  as  well  as  chan<4is  in  the  values  of  uoods  is  very  ini- 
jjortant.' 

Every  mail  of  business  who  l)uys  imd  sells  property 
lias  a  deep  interest  in  the  iluetuation  of  prices.  M(;,t 
of  them  arc  thorouohly  familiar  ivith  the  causes  wliich 
produce  fluctuations  so  far  as  they  are  caused  by  in- 
fluences atfectino-  commodities.  Only  those  who  have 
made  a  special  study  of  the  subject  comprehend  the 
influence  of  the  fluctuations  (.f  prices  on  the  conditions 
affecting'  the  momy  side  of  Ihi'  ratio. 

80.  Prices  ihpiinl  iijnni  tJic  inoiicii  inarl-ci.  A  lon< 
continued  and  steady  rise  of  prices  may  take  |)lace  in 
the  face  of  conditions  of  su|)[)ly  and  demand  for  com- 
modities which  would  seem  to  warrant  (|uite  the  opi)osit(> 
tendency.  ( )n  the  other  hand  there  mav  be  a  very  oivat 
fall  of  pru'cs  notwillistandiui.'  the  fact  tliat  conditions 
of  supply  and  demand  for  commodities  iustilV  hi«dier 
pricis.  The  explanation  of  this  must  be  soiioht  for  in 
the  money  market. 

The  \  :due  of  mnn.y  as  o^  everythiiio-  vhc  is  the  result 
of  an  e(|uilil)riuui  between  su!)i)Iy  and  demand.  How 
these  forces  j)roduce  the  result  so  far  as  ^dods  are  eon- 


r 


cerncd   we  haxc  ali-ia(l\- 


seen    III 


eiia|)t(r  on    \;ilue. 


.Im!> 


Mi.iicv    ,inil  ( 


SUrrLY  AND  DEMAND 


71 


The  value  of  iiionev  is  determined  in  tiie  same  way,  but 
the  eonditions  of  supply  and  demand  are  so  complex  as 
to  re(|uire  a  special  study  of  tiiem. 

HI.  VtUltii  of  moncij. — Money  is  utility  in  the  form 
ol'  immediate  universal  acceptal)ility.  Its  utihty  lies  in 
its  exchan<4eabiHty  in  the  same  manner  that  nutrition  is 
tlie  basis  of  the  utility  of  food.  Money  is  demanded 
hecause  of  the  need  felt  by  men  for  this  particular  kind 
of  utihty.  Tlie  name  ^vllieh  Me  fj^ive  to  this  conscious 
need  of  men  for  anythin<r  is  "desire."  The  failure  to 
(hstinguisli  between  desire  and  demand  has  been  a  fer- 
tile source  of  error  in  economic  thouti,ht.  Some  of  the 
most  eminent  of  earlier  economists,  observing  that  the 
desire  for  money  was  universal  among  men,  concluded 
that  therefore  the  demand  for  money  was  unlimited. 
If  that  were  the  case  it  would  be  a])S(^lutely  impossible 
to  analyze  the  forces  determining  the  value  of  money. 
It  would  be  the  same  as  the  attem])t  to  find  tiie  point  of 
equilibrium  which  would  be  the  result  of  several  phys- 
ical forces  if  one  of  these  forces  was  intinite. 

82.  Distinction  J)ft:ccrn  desire  (u>'J  demand. — De- 
mand as  used  in  an  economic  sense  is  "'desire"  backed 
u])  by  the  willingness  to  sacriticc  or  give  up  something 
in  exchange.  The  oidy  method  we  have  oi'  measuring 
demand  is  by  thi'  amount  of  \ahie  which  will  be  sacri- 
ficed in  order  to  obtain  the  object  oi'  the  demand.  The 
demand  for  money  can  be  measured  oidy  by  the  amount 
of  other  valuable  j)roperty  which  will  ])e  given  in  ex- 
change for  it. 

l/ndcr  the  foregoing  definition  the  demand  for 
moncv  is  limited,  detinite.  and  lial)lc  to  fluctuate  from 


f,.  \\ 


If     ..      mill     i.n'.i-c     SJ'IOM      i',,1.     ..     l,,>v 


m 


('\  ident  that  bis  desii'c  for  the  horse  is  greater  than  his 
desire  for  $.*J()().     The  seller  of  the  horse  would  desire 


la 


MOSV.y   AND  nAXKINCJ 


ilii 


tlic  in..,RT  more  than  the  horse.  The  ,,.ie.stio„  of  the 
(leiiiaiKl  |„r  money  !iiay  he  reduced  to  this:  Why  do 
people  desire  moneys 

^  8.'J.  Thnr  varulirs  „f  mi,„c,i.~  \n  the  first  phice  it 
IS  necessary  to  (h-stinnuish  heturen  .h'tferent  varieties 
"<■  money.  There  are  three  kinds  of  ,nonev:  stan.hird 
money,  fiat  money,  and  crecht  money.  T|,e  demand  for 
these  (hfferent  varieiies  is  not  uniform  and  under 
various  cn-cumstances  shifts  from  one  to  the  other. 

Staiuhu-d  money  or  commodity  monev  is  some  ma- 
terial which  because  of  its  proprietary  (lualifications  has 
heen  a.lopte.l  hy  any  particular  oroup  of  people  as  a 
common  medium  of  exchanoe,  as  explained  in  the  ],re- 
(vdmo-  ciiapter  on  the  Evolution  of  .Money.  Its  supply 
IS  reoiilated  automatically,  heinu-  dependent  on  the  cost 
I'l    |)roduction. 

Fiat  money  is  the  medium  „f  exchanoe.  tlie  value  of 
>vhich  has  IK.  relation  to  the  w(,rth  of  the  material  com- 
P"sm-  it.  Its  value  is  derived  from  its  utility  as  -i 
medium  of  exchanoe.  Its  supply  is  reouhited  artifi- 
cially hy  leoislative  enactment. 

Credit  money  is  simply  a  promise  to  pay  the  money 
which  is  m  such  form  that  it  can  he  used  as  a  medium 
nl  exchanoe.  \  promise  to  pay  money  hy  some  re- 
si.ons.hh-  party  m  .y  he  just  as  valuable  or'even  more 
valuable  than  the  money  itself  if  it  serves  the  purpose 
of  money. 

_  «^.  I'lat  V.  credit  //,o//r//._Tlie  distinction  between 
<'^'t  and  credit  money  is  an  excee.iino-ly  difficult  one  to 
make  u.  practice.  In  practically  every  <-ase  of  Mat 
""•"(■y.  there  is  a  promise  eitlur  expressed  or  implied 
to- pay  the  amount  in  standard  monev  at  son.e  Ir.d^.finlt^. 
tin.c:  If  not  a  promise-  at  least  an  "expectation  or'ac- 
ecptanee  o|   th<-  money  in  payment  of  taxes  and  other 


SUPPLY  AM)  DKMAND 


78 


I 


Slims  due  the  ^overnnieiit  issuing  it.  It  would  he  (htH- 
ciiit  indeed  to  imagine  tint  money  whieli  the  government 
itself  wouhl  not  aeeept  in  payment  or  whieh  it  never 


i.\l)ec 


ted  t 


o  redeem 


■I 

S5.  Demand    for    moiic//    anali/rxd. — Tlie    demand 

ir  monev   nuiv  he  studied   hv  analvzlntr  the  various 


torms  () 


f  d 


esire  for  monev. 


1.  People  desire  money  for  the  purpose  of  exchang- 
ing it  for  other  commodities  within  a  short  time. 

'2.  l^eople  desire  money  that  they  may  have  a  store 
iif  \alue  which  for  the  time  heing  is  preferahle  to  goods 
which  have  a  (1;  (lini't  utility,  '.  e.,  those  affording 
satisfaction  hy  tlieir  use,  or  ('2)  indirect  utility,  i.  e.,  the 
use  of  which  jjroduces  more  value,  as  in  the  case  of  all 
cnpital  gootls.  In  some  I'are  instances  the  money  is 
esteemed  for  itself  alone  without  reference  to  its  ex- 
changeahility,  as  in  the  case  of  a  misers  hoard. 

a.  People  desire  money  as  a  reserve  liasis  for  credit. 

These   three  classifications  cover  all   the  desires  for 
money  and  changes  in  the  intensity  of  these  desires  have 
a    their  effect  on  the  Aalue  of  money. 

HO.  liapiditji  of  circniation.- — The  extent  of  the  de- 
sire for  mon'n'  for  the  ])urpose  of  exchanging  it  for 
goods  within  a  short  time  determines  the  rapidity  of 
circulation.  The  measure  of  the  rapidity  of  circula- 
tion of  money  is  the  form  of  exchanges,  which  is  de- 
Ijcndent  upon  four  factors;  1.  The  numher  of  popu- 
lation. 2.  The  production  and  distrihution  of  wealtli 
uw  capita,  'i.  The  extent  to  which  division  of  lahor 
nr  speciali/ation  of  employment  prevails.     -4.  The  ex- 


tent of  the  integration  of  industry 


wr     //'  //', 


./  /./' 


,/.,/; 


rui, 


\] 


1111   fl'L."        il<'lf1/l*      <>i1t1>ll 


louhling  the  poj)ulation  would  douhle  the  demand  for  a 


I'lrcuiatina'  medium 


Thei'c  woidd  he  t 


wice  as  ma 


»y 


,     '^!* 


nil 


'^^  MOM.V  AM)  HANKING 

producers  and  twice  as  many  consumers.  Tlicrel'ore  it 
would  re(iuire  just  twice  as  niucJi  money  to  circulate 
the  goods  re(iuired  for  their  consumi)tion.  '  In  a  country 
of  increasinu'  l)o|)iilati.)n.  thererorc.  there  must  he  an  in'- 
crease  in  the  (piantity  u\'  mone_\ .  Otherwise  the  in- 
creased demand  upon  the  supply  will  t,.|„j  to  raise  the 
value  or  money.  I)rinniiiu>  witji  it  fallino'  prices. 

Kven  with  a  stationary  population,  advancing-  civiliza- 
tion inevitahly  hrings  an  increase  in  the  production  and 
consumption  of  Mcaith.  the  circulation  of  which  i)uts  a 
greatei-  demand  upon  monev. 

88.  Kll'cct  of  (Vnis'ion  of  /a/;or.— Alono-  ^vith  the  in- 
creased production  of  oo,„]s  per  capita  comes  the  in- 
creasino-  division  of  lahor.     In  fact,  the  greater  special- 
ization of  employment  is  one  of  the  most  potent  causes 
of  increase  of  wealth.     In  primitive  communities  wliere 
the  producer  consumes  a  large  ])art  of  his  pn,(luct  there 
is  little  demand  for  money,  not  at  all  in  projxM-tion  to 
the  productivity  of  each  man.     Whenever  men  hegin  to 
conHne  themselves  to   fewer  occupations,  especiaUy  if 
at  the  same  time  the  variety  (.f  their  wants  increases, 
they  are  under  the  necessity  of  ohtaining  their  supplies 
hy  means  of  exchange,  and  this  exchange  re(iuires  a 
medium.     Hence  it   is  that  division  of  lahor  reciuires 
an  increase  in  the  supply  of  money  out  of  projKH-tion  to 
the  increase  ol"  ])r<)(luct  per  ca[)ita. 

()pi)osed  to  this  tendency  and  lessening  somewhat  the 
(k-mand  for  money  is  the  integration  of  industry. 
AN'hen  a  numher  of  individuals  or  corjKJrations  engaged 
in  the  various  i)rocesses  of  the  manufacture  of  Ti  line 
oi"  goods  comhine  so  that  the  several  i)r()cesses  are  con- 
ducted imder  one  ownershij).  the  neeessity  for  a  larue 
numher  of  exchanges  is  eliminated.  It  may  even  go 
so  far  that  no  exchange  takes  place  after  the  r.iw  nm- 


SUri'LV   AND  I)i:.MANi) 


76 


■.3 


I 


ttiials  :UT  i)urchasc(l  until  tlic  tinislKcl  i)ro(liict  is  sold 
to  the  c'onsuincr. 

H9.  Special  (hinand  for  i^old. — Uiuler  prcst-it  condi- 
lidiis  in  this  coiiiitrv  all  tlu'  f'oi'nis  of  money  in  ciivuia- 
tinn  |)(.'rr<)i-in  llu-  rnnction  of  cxcluin^in^  ^^oods  (-'(luaily 
\\(li.  with  possibly  a  slight  ad\anta<4V  on  the  j)art 
ol'  j)aj)cr  credit  money  on  the  score  of  convenience. 
Ill  our  trade  with  forei<>'n  countries,  however,  if  there 
is  a  balance  of  imports  over  ex[)orts  one  way  or  the 
other  wliieh  must  he  settled  with  money,  there  is  only  one 
i'nrm  which  will  serve  the  ])nrp()se,  i.  e.,  ^old.  Increase 
of  demand  from  this  sonree,  may  under  some  circum- 
stances tend  to  enhance  the  value  of  ^old,  inde{)endently 
of  the  value  of  the  other  forms.  This  phenomenon  ap- 
])ears  in  the  form  of  a  preUiium  on  gold,  of  which  we 
shall  speak  later. 

!)().  Pai/mcnt  of  contracts. — Anotlier  demand  for 
money  is  in  the  ])ayment  of  contracts.  T/nless  there 
is  a  dis})arity  in  the  value  of  the  different  forms  of 
money  the  demand  for  money  to  liciuidatc  contracts  is 
likely  to  fall  on  all  etiually.  Sometimes  the  demand 
for  mone}'  for  this  purpose  is  artificially  interfered  witii 
by  the  (iovernment,  as  in  the  case  of  le^al  tender  laws 
which  force  the  creditor  against  his  interest  and  inclina- 
tion to  acce])t  certain  forms  of  money  such  as  the  green- 
backs. The  tendency  in  such  a  case  as  this  is  to  shii't 
the  demand  from  gold  to  credit  money,  and  thus  to 
eliminate  the  disparity. 

91.  Store  of  value. — The  demand  for  money  as  a 
st(<re  of  value  without  the  intention  of  exchanging  it 
for  goods  within  a  short  time  de])ends  largely  ujxjn  the 
habits;  of  the  ueoijle  and  the  stabilitv  of  the  (rovern- 
iiient.  Money  as  a  store  of  \alue  is  at  a  disadvantage 
when  compared   with   produelixe  pro[)erty.  and   under 


Ml 


76 


MONEY  AND  BANKING 


■  <'■ 


iK.riJial  conditions  priuknt  people  will  regard  stores  of 
money  as  very  unproiitahle  investments. 

92.  ItiMcirilfi    of  propcr'/f   and   contrach:—Umkr  \ 
certain  conditions.  Jiouever,  it  may  he  advantageous  to 
I'old  property  m  the  form  of  money.      In  countries  such 
as  Turkey,  where  tlie  governme.it  is  unalile  to  protect 
property  and  where  it  is  hahle  to  heas  v  taxes  or  even 
to  confiscation,  the  j.rotit  derived  from  the  investment 
of  money  m  pro.hictive  enterprises,  althougl,  very  great, 
niav  he  so  risky  and  uncertain  as  to  he  unattractiVc.     In 
such  a  country  those  citizens  who  a-e  least  protected  hy 
the  government  are  inclined  to  safeguard  their  future 
welfare   hy   hiding   away   their   wealth   in   the   form   of 
nioney.      The  satisfaction    thex    derive    from   the   con- 
sciousness of  heing  protected  in  their  old  age  and  hein. 
ivhevcl   from  the   fear  of  Ims.    .f  pn,p.,rtv  More  than 
compensates  them  for  the  loss  u,   even  a  large  income. 
According  to  the  extent  to  which  property  is  protected 
and  contracts  are  enforced,  as  well  as  the  amount  of  in- 
come that   can   he   derived    fn,m    Investments,   will  the 
people  of  any  country  he  disinclined  to  hoard  accumula- 
tions ()(  nioruv. 

J>.*i.  -V/^<  ,7V//  (fnnanil  for  m,>tuf/  as  a  sloir  of  value— 
In   every   country,    however.   „<.   mailer   how  stahle  the 
^•""<l't""is.   there  aiv  limes  when  iii,.„ev   is  m„re  hi-dilv 
esteemed    than    any    ..Iher    Inrm    of    pn.pcrtv.      \Vheli 
«l'<''e  is  a  prosp.el  of  falling  prices  of  comm.ulitics  it  is 
.•idvanfageous  t„  ex,.hange  property  for  m..nev  hecausc 
'''•■;•''"'•'  '"'  "lon-y   rises   in  exact   proportion  as  com- 
"••><l'«"^  I'.'-ll.      At  the  end. .f  periods  of  prosprritvwh.n 
("•"•'■^••l   .-'11  property  Ium<.  he,„  iuHatc.l  and  tju're  is  a 
'"'"''"■•;*  *'''•'•  <l"<'>ilm, nation  of  Ij,.  j.oom  is  approaeh- 
-■■  =  ■•    -■-■■•    .i.;.ii;s  i>  i,K,  i\    (o  he   |)er('ei\ cd  siid- 
''"•    ''>•■'  '•"■.^'    ">iniher(,f  peopi,,  ns  ho  at  onee  heeome 


in  I 


SUPPLY  AM)  DKMAND 


<  ( 


eager  to  cxflumge  their  propcrtv  into  cash;  the  desire 
dt'  a  hirge  lunnber  to  sell  id  the  same  time  of  course 
hiiiigs  a  siulcleii  fall  in  prices  whieji  we  call  a  [)aiiic. 

'{'he  converse  of  this  takes  place  at  the  Iieginning  of 
;i  lioom  period,  when  people  realize  that  pi'ices  are  too 
Inw  and  that  purchases  Avill  yield  large  speculative 
|)i()Hts.  There  is  a  rush  to  i)uy,  that  is  to  say,  a  desire 
to  convert  money  which  is  about  to  i'all  in  value  into 
I'orms  oi'  i)roj)erty  which  will  increase  in  value. 

'I'lie  desire  to  convert  proj)erty  into  money  is  only  one 
111'  the  causes  and  symi)toms  of  a  panic.  In  a  later 
iha|)ter  on  credits  a  fuller  discussion  of  this  will  he 
uiven.  The  liciuidation  of  credits,  either  forced  or  vol- 
imtai'v.  at  the  beginning  of  a  ])anic  accounts  for  a  large 
pii't  of  the  sudden  demand  for  money  and  is  the  prox- 
imate cause  for  the  liciuidation  of  j)ropfc,'rt\'. 

!>t.  IltHirdhii^. —  When  the  storing  away  of  money 
liecomes  excessive  we  call  it  hoarding.  It  would  be  ex- 
(ccdingly  ditTicult  to  attempt  to  draw  the  line  Mhere 
hoarding  begins.  'I'he  amount  of  money  which  prudent 
people  will  have  ready  for  necessary  purchases  and  the 
payment  of  debts  will  vary  widely  under  different  cir- 
cumstances. In  the  panic  of  1!)()7  the  country  l)anl\s 
.ill  over  the  country  withdrew  their  deposits  from  the 
New  ^'orl<  banks  in  order  to  be  amply  protected  in  case 
iif  large  sudden  demands  from  theii-  dejxisitors,  A 
ureat  many  banks  cairied  this  practice  to  an  urueasof- 
ablc  extent  and  filUd  their  \aults  with  money  for  whii'h 
Miey  jiad  no  use  and  for  which  thei'e  was  likeK'  to  l)e  no 
lisi-  cxci'pt  in  the  case  of  most  e\t raordinai'v  disaster. 
S"icli  storing  awav  of  money  might  propei-ly  be  called 
lioardiniL!'. 


0.).    i'hci'i 


l!( 


(if    i/diiniitijf.      Steady    jtrogress    lu    tiie 


liree 


tiiiii  of  improving  the  linaneial  atid  lianking  sys- 


78 


tf|i 


MONKV  AM)  HANKIXG 


terns  and  the  widespread  e.lneation  nl'  the  people  in  the 
advantages  of  deahn^  with  banks  lias  chniinished  hoanl- 
in«-  m  this  ecnuitry  nntil  iwider  nonnal  con(htions  in  the 
prese,^  era  it  is  praetieally  hnntecl  to  persor.s  in  rural 
(I'striets  and  to  a  tew  eeeentrie  in,lividuals  wh..  are  will- 
H.J(  to  rnn  the  risk  of  rohhery  in  order  to  enjov  the 
•snt.siaet.on  of  an  oeeasional  view  of  a  pile  of'  v'elhnv 
coins  or  ol  u;yfL'u  paper. 

li  is  extremely  easy,  however,  to  frighten  people  out 
«>1  then-  hanku.o-  |,ah,ts  and  eause  them  to  revert  to  the 

more  primitive  methods,     'i'he  f-iihir.'  ..f  ..   .  .       • 

I      ,  ,,  ^  "^   i.uiuie  ot   a  prominent 

;ank  or  the  exposure  of  improper  methods  in  hiVh 
^jnanee  u  ,11  u.duc.e  a  o,,,at  many  timid  persons  to  wit^i- 
«t'-aw   their   deposits    fn.m    l)anks   and    stow   awav   the 

|H<uuy  m  safety  deposit  vaults  or  in  s,,me  hidin^'plac-c 
ill  their  lioiiKs.  ^  '■ 

00.  liauh  ,r.sr,rr.v  m>f  hoards.^^Thv  enormous  sums 

"'  money  stoivd  in  the  vaults  of  hanking  institutions  are 
;;;'  '"•*"';'"^,  "■  ^'"'  -"-  *"  -'•■■*•''  -<■  a,.,  usi,...  the  term, 
llicse  dollars  are   really   supporting-  the   .-mlit   of  the 

'-"..try  wln.h  as  a  suhstitute  is  <loino-  the  real  money 
->rL  In  laet.  a  dollar  ma  hank  reserve  haekiuK  up 
c-ml.t  .s  really  d,,in^  four  or  five  tiiues  as  n.ueh  work  ;/s 
its  brother  meireulation.  The  full  explanation  of  this 
point  IS  deferred  to  the  diapt.rs  on  e,vdit. 

07.  anrn-nnuni  hoan/iu^:    While  the  oreat  sums  r,f 

;•""->•'"  '••••"k  .•-.rves  are  not  hoanls  unless  thev  should 
•;■  .x^vssive.   their  aiv  at    times  hu^v  amount,;   in   the 

...vm.n.rni  treasury  and  suh-treasuries  whieh  are  reallv 
,'"';',•  "'•'  '^'"  '"I'.i.'s  that  $i:,(M)()(,.,„„)  i„  .,,,1,1 
^l.'.il  hr  maintaine.l  {„   ,|,,  ,,,,,,„,^.  ^.^  reserve  a-, dnst 


the 


^reenhaeks   outstandiiin-. 


■serve  and  not  a|  all  a  ho;.-! 


sil 


ver,   both   coin   and    i 


I'his   sum   is  a   true   r(>- 
,  ...1 1.  . .  . . 
iKM  ,  ,  liic  yoi(i  and 


•""'"".    "liiHi    are    held    in    ti, 


SUriMA    AM)  DK.MAND 


1) 


¥^ 


[1  the 
)ar(l- 
)  the 
'lira  I 
will- 
tlie 
Hon- 

out 

the 

lent 

ith- 

the 

lace 

I  ins 
are 
rm. 
the 
ley 
lip 
as 
his 

of 

lid 

he 

Iv 

hi 

st 

e- 

i(i 

le 


I 


I 


treasuries  and  af^aiiist  which  ^ohl  and  silver  certiticatcs 
are  circulatiu<>-  are  not  hoards,  Tlie  pa[)er  money  which 
represents  them  is  doing  the  work  hy  proxy.  Unhke 
the  hank  reserve,  however,  which  through  its  suhstitutes 
does  four  or  five  times  the  amount  of  money  work,  the 
uohl  and  silver  certificates  do  no  more  than  gold  and 
silver  itself  could  have  done.  The  only  advantage  de- 
rived from  the  system  is  the  greater  convenience  and 
llie  saving  of  the  wtar  and  tear  on  the  metal. 

Another  part  of  the  money  held  hy  the  (iovernment 
represents  a  store  of  cash  ready  for  future  expenditures. 
This  is  the  sum  necessary  to  he  kept  on  hand  in  order 
to  provide  for  ])urchases  within  a  short  time,  just  as 
individuals  find  it  necessary  to  keep  a  certain  amount  of 
(■;ish  on  hand  for  the  same  purpose. 

.Vnv  amount  of  money  held  in  the  treasury  heyond  tlie 
sums  mentioned  ahove  is  a  hoard,  ir'i)resenting  jnirchas- 
iiig  power  which  is  withheld  from  cii'culation  and  for 
the  time  hcing  ahsolutely  useless. 

1)8.  Disiriinitidfioii  in  demand  for  tnaiici/. — The  dif- 
tVrent  forms  of  demand  for  money  which  we  have  out- 
lined ahove  do  not  apply  at  all  times  eijually  to  all  the 
ililferent  varieties  of  money.  There  arc  sometimes  cir- 
cumstances when  llu'  (kiiiand  falls  ui)on  one  kind  alone. 
So  long  as  all  the  different  forms  are  kept  at  parity  the 
ilemaiid  for  a  circulating  medium  to  exchange  goods  or 
to  li(piidate  debts  is  satisfied  with  either  form.  'I'heti 
soiiulimes  the  <piestion  of  convenience  j)lays  a  jiart,  as  in 
tl'.'  case  of  the  siUer  dollai"  after  the  sihii-  ])urchases  in 
the  HOs.  'I'hr^e  silvrr  {lolhirs  did  not  circulate  in 
the  (piaiitities  desirid  hecause  the  ptcple  had  learned 
to  prefer  paper  on  the  score  of  eon\  (  iiienee.  'I'hcy 
would  n  fust    to  tak(    tin  ni   iroin   tjie  iianivs  and   would 


.2i2^1i 


.'pu: 


,il  Ihem  I'reeK  ;  the  h.iiik--  would  turn  them  hack 


80 


MONKV  AND  BANKING 


.r 


*  TtFT  rt 


into  tlie  CiovciiiiDcnt  tRasury  ii)  cxdianoc  for  paper 
which  their  (Icpositors  (Iciuaiuled.  The  (ioreriinient 
even  went  so  far  as  to  pay  express  charges  to  dis- 
tant points  in  order  to  keep  the  silver  dollars  in  circula- 
tion. Finally  the  ingenious  i)lan  was  hit  upon  of  stor- 
uio-  away  the  silver  dollars  and  issuinn-  ;„  their  stead 
silver  certificates  of  out-  and  two  dollar  denominations, 
which  were  circulated  in  their  place. 

0!).  f^cm^nnal  dcmaud  for  fnoiin/.-Y or  00  i)er  cent  or 
more  oi'  the  d(Miiestic  exchanges  no  money  is  recjuired  at 
all,  hank  credit  in  the  form  of  checks  and'  drafts  serving 
the  purpose.     This  relieves  the  money  of  the  country 
or  most  of  the  demand  hut  there  are  circumstances  wheii 
this  hank  credit  fails  to  do  its  work.     During  the  crop 
moving  season  in  the  South  and  West  there  is  a  demand 
lor  a  medium  of  exchange  which  cannot  he  supplied  hy 
hank  credit.     Kvery  autumn  there  is  likely  to  he  a  de- 
mand for  ahout  S1.-,().()(M).()()()  „f  extra  moiley  to  finance 
the  crop  moving.     This  sum  must  ordinarily  come  out 
of  the  reserves  of  the  hanks,  causing  a  contraction  of 
crc.ht.  after  <redit  has  heen  exi.ande.l,  and  giving  rise 
to  dangerous  stringency  in  tlu    financial  centers.     This 
special  seasonal  demand  for  cash  and  the  monetary  proh- 
IfiHs  which  it  occasions  will  he  the  suhject  of  special  dis- 
cussion later  in  this  \olnmc. 

100.  Demand  fnr  monc//  in  infrrnnfinnal  trade.  - 
'ri'c  exchanging  of  ,n-,,n,l,s  hefw<rn  this  cMnifry  and 
•••'"•"•"I  iv.|uires  the  use  „f  |,„t  a  minimum  of  u'loney 
only  th.  differences  hetween  the  exoorls  and  imports 
•"■'■  n-.|uired  to  !„■  settl<d  in  ,.asl,.  The  „nlv  possihle 
'■'"■'n  "I'  uion,y  uhiel,  can  he  ns,  ,|  in  making 'this  inter- 
national settlement  ,.f  I  mde  halanees  is  gold.  Some- 
times t;u-  ilinirrnr,  iKlucti  ilie  imports  ;iii,i  exports 
IS  so  ureal,  or  th.  re  has  heen  so  much  international  hor- 


SUITLY  AND  DEMAND 


81 


! 


lowin'i'  that  the  resultiiio-  nioveiiK'nt  of  gold  in  or  out  of 
the  eountrv  is  a  (juestiod  of  extreme  iinportanee  because 
of  the  effect  it  lias  u])ou  hatik  or  (Government  reserves 
;iii(l  the  maintenance  of  credit.  Jt  is  this  demand  for 
i;<)ld  to  he  used  in  makin^^  f()rei<4'n  settlements  that  ac- 
counts for  the  appearance  of  a  premium  on  ^old  under 
tcrtain  circumstances.  Whenever  foreign  hanks  tind 
that  they  cannot  exchange  other  forms  of  money  for 
uojd  they  are  driven  to  procure  it  wherever  they  can  by 
olfti-ino-  a  j)remium  for  it. 

101.  Premium  on  ^'o/^Z.— Kx|)erience  lias  shown  that 
ihe  appearance  of  a  small  j)remiuni  on  n()]d  is  attended 
hy  such  serious  disturbances  in  the  credit  situation  of  the 
country  that  such  an  event  is  to  be  avoided  if  possible. 
The  seriousness  of  this  matter  led  President  Cleveland 
ill  ]S!)1-  to  |)iit  out  issues  of  bonds  and  later  to  deal 
with  a  syndicate  of  \t\v  ^'ork  banks  in  order  to  jire- 
\cnt  a  premium  on  gold,  or  in  other  words  to  maintain 
;i  i)arily  among  all  forms  of  money  in  the  Cnited  States. 
'I'he  l*resi(Kiit  did  this  in  the  lace  of  |)opiilar  disap- 
pro\al  by  the  mass  el'  citi/.i'iis  who  did  not  j)ercei\e  the 
necessity  for  these  actions. 

All  rorm>«  of  money  (except  national  bank  notes  ,n 
national  banks  tbciiisth  cs  i  ser\c  the  purpose  of  bank 
reserxcs  e(|ually  well,  although  gold  is  |>rcfci'ab|c  be- 
cause it  assists  the  (Jo\ermiient  ii:  siippoi-tiug  tlu'  cir- 
culating credit.  It  has  been  j)ro[)osed  in  recent  currency 
hills  to  compel  the  banks  to  m;iintaii;  their  reserves  in 
-old  in  order  that  tlu  re  shall  always  be  a  satisfactory 
hasi*^  for  the  ci'cdit  of  the  country. 

102.  Viiviilii'nili,  of  IIk  (l('m(iii(!  for  moucij.  'I'iic 
'!(  iiiand   for  luomv    is  a  xcry  uncertain  (piantitw      The 


iiiict  rtaint  les  o 


lit 


s  suhstitutc.  credit,  mav  cause  \erv  sud 


lien  and  \(.ry  great  changes  in  the  diniand  for  nioi 


uv, 


\  II- 


\/^^' 


82 


.MONEY  AND  BANKINi 


\  ' 


Tlie  growth  of  population  iiiLTcascs  spt'cialization  of  em- 
ployment and  tile  increasing  volume  of  industry  per 
caj)ita  causes  an  increasing  demand  for  a  medium  of 
excliange.  On  the  other  hand,  however,  the  perfection 
of  the  credit  machinery  and  the  extension  of  hanking 
facilities  economize  the  use  of  money  and  lessen  the  de- 
mand. The  suddemiess  with  which  any  derangement  of 
the  financial  machinery  will  cause  a  shift  of  dcrnand 
from  one  form  of  money  to  another  is  one  of  the  com- 
l)lexities  of  the  subject. 

1  ().'{.  SuppJii  of  moucij. — In  contrast  with  the  insta- 
bility of  the  demand  for  money  the  supply  of  money  is 
so  stable  as  to  give  rise  to  the  problem  of  "clastic  cur- 
rency." 'I'hc  only  ^ariable  clement  in  the  supply  is 
found  in  cridit,  which  is  a  substitute  for  mojiey  and 
does  the  same  kind  of  service. 

10 k  Vfiriftiis  of  Ignited  iSidfcs  rtwiic//. — In  the 
TJnited  States  at  the  preseiit  time  there  is  in  circulation, 
first,  the  Knited  States  notes  or  greenl)acks.  The  suj)- 
ply  of  this  form  of  money  is  absolutely  unchanging, 
amounting  to  .$3  MJ.OOO.OOO. 

Second,  the  gold  and  silver  certificates,  representing 
actual  metal  de|)osited  in  the  trcasin'ics.  The  sup{)ly  of 
these  certificates  varies  with  the  amount  of  gold  and 
silver  dej)osited  in  Washington  and  the  increase  or  de- 
crease in  theii-  amount  is  offset  by  a  corresi)ondiniflv 
opposite  change  in  the  supj)ly  of  metal  money. 

Thii'd,  National  bank  notes  are  somewhat  elastic,  but 
are  so  limited  by  the  amount  of  bonds  which  banks  can 
ac'.iuire  to  deposit  as  security  i'or  Iheni  that  the  supplv 
does  not  (•li;uigc  in  rcsponsi-  to  the  demand. 

I'oiirtli.  The  supply  of  silver  eoinag.'  in  the  couiitry 
is   rcgiilalrd    I'v   arliitrai-y   action  of   Ijie  Government. 


SUPPLY  AM)  DM.MAND 


83 


a 


Outside  the  siihsidiarv  coinaf^c  its  use  is  so  limited  that 
it  cannot  he  re^nirded  as  an  ehistic  elejii'.nt. 

L'ifth,  (iold  is  tlie  (Jiily  n^ally  thistie  elenieut  in  our 
country  at  the  present  time.  Tlie  amount  in  the  country 
for  monetary  purposes  at  any  time  is  influenced  hy  ouV 
financial  and  trade  relations  with  forei^^-n  countries.  In 
tlie  chapter  on  foreiii'ii  exchanges  the  causes  of  increase 
)r  decrease  in  the  (luantity  of  o^old  in  the  country  is 
,  \l)lained  in  all  its  details. 

10.).  Stipplji  of  ^'•o/</.--The  (|uantity  of  oold  actually 
(•roduced  in  the  country  has  very  little  effect  upon  the 
Mipply  in  that  country,  (lold  is  so  easily  transjjorted 
that  it  eiiually  distrihiites  itself  throu^Iionl  the  world, 
^cckinn'  those  countries  where  its  value  is  i^i't  atest.  The 
listrihution  of  oold  may  well  he  illustrated  hy  comjjar- 
'ii<>'  it  with  water  |)oured  into  one  of  a  series  of  vessels 
•oimected  hy  pipes.  U^ater  jjoured  ii:to  one  vessel  dis- 
irihutes  itself  throuiih  all  the  connected  series  so  that 
.)ne  level  is  maintained  throu^diout  the  whole.  If  the 
pipes  ar''  small  or  cloi^'^red  up  tliere  may  he  considerahle 
delay  in  the  (listrihution  of  the  water.  In  the  case  of 
H'old  there  may  he  for  short  i)erio<ls  of  time  inecjualities 
in  the  (listrihution  of  u<)I,i  which  are  to  he  accounted  for 
iiy  distnrhances  in  the  machimry  of  exchange;  ulti- 
mately, however,  "^old  will  find  its  level  throughout  the 
woi'ld. 

I()().  Factors  In  the  snp/iIi/  of  <r()J<J.--Thv  snj)i)ly  of 
uuld  is  determined  hy  tlie  same  factors  which  determine 
llie  price  of  any  other  commodity.  There  is  ahvavs  a 
tendency  for  the  supply  to  he  incr(.ased  so  j()n«^  as  there 
IS  a  profit  in  its  production.  If  the  cost  of  {jrodueitiL,"- 
iioUl  is  considcrahly  helow  its  v;due  there  will  he  ;i  strn»!.<«' 
inducement  to  enlarge  the  operation  of  mines  and  to 


84 


MONEY  A\D  RANKING 


till 


Mil 


prospect  ior  new  mines.  However,  as  the  quantity  of 
gold  in  circulation  increases,  the  effect  will  be  to  raise 
prices,  as  shall  presently  he  explained.  This  rise  of 
prices,  affecting  as  it  does  all  the  implements  and  ma- 
terials used  in  mining  as  well  as  the  wages  of  the  miners, 
increases  the  cost  of  production  and  thus  diminishes  the 
margin  of  profit  made  in  the  production  and  the  value 
of  gold  until  all  the  profit  of  mining  may  disappear  in 
the  mines  wjiich  have  the  highest  cost  of  production, 
causing  them  to  shut  down  and  cease  contributing  to  the 
su];ply.  In  this  way  the  production  of  gold  is  auto- 
matically regulated. 

107.  PccuUariiii  of  the  .siippi//  of  ^oW.— There  is  a 
peculiarity  in  connection  with  the  sui)ply  of  gold  which 
distinguishes  it  from  any  other  commoility.  The  sup- 
ply of  a  commodity  may  be  considered  as  a  sum  of  util- 
ities Avhich  satisfy  human  want.  The  suj)ply  of  wheat 
Avhen  analyzed  means  the  number  of  units,  each  of  which 
has  a  certain  ])ower  to  satisfy  hunger.  Two  bushels 
of  wheat  have  twice  as  much  power  in  this  respect  as 
one. 

In  the  case  of  gold,  however,  the  utility  consists  of 
its  poMcr  to  exchange  other  commodities.'  Now  there 
is  no  reason  at  all  why  <mv  grain  of  nutal  might  not  do 
.just  as  much  w()ri<  of  exchanging  commodities  as  one 
o'lnce.  If  the  (juantity  of  o„ld  i„  the  world  is  doubled 
at  the  same  time  that  the  prices  of  goods  in  general  are 
doubled.  th(>  increased  (piantity  of  gold  will  do  no  more 
money  work  than  the  original  amount,  and  the  money 
supj)ly  of  the  world  has  n..t  been  increased  at  all  when 
measured  by  its  c  Ifectix  eness. 

lOH.  Ilisfurical  /////.s//7///V,./,',v. -Then  bav<-  I,.  ...i  three 
periods  in  history  whid,  illustrate  this  nv.ural  j»roposi- 
tion  very  clearly.     The  -r.  at  increase  in  the  amount  of 


SUPrLY  AM)  DEMAND 


85 


I 


sihtr  ill  the  world  ut'tcr  tlie  iliscovery  of  xViiicricu  and 
the  opening  up  of  South  iVnuricaa  and  Mexican  silver 
mines  by  the  Spaniards  in  the  sixteenth  century  caused 
;i  tremendous  change  of  prices  for  e\  ery  commodity. 

The  discovery  of  gold  in  California  and  i\ustralia  in 
the  middle  of  the  nineteenth  century  was  followed  by  a 
similar  rise  in  general  prices.  At  the  present  time  we 
are  undergoing  a  ])eriod  of  increased  gold  production, 
(Specially  in  South  ^Vfrica,  and  accompanying  hi/I'll 
prices. 

In  each  ol'  these  periods  the  great  enlargement  of  the 
stock  of  standard  money  in  the  world  produced  a  pro- 
found social  effect  and  radically  altered  the  relations 
Iittween  dei)tors  and  creditors.  The  small  (piantity  of 
money  metal  in  existence  before  these  discoveries  were 
made  would  to-day  do  just  as  much  work  if  there  had 
lieen  no  increase,  but  the  le\el  of  prices  would  be  very 
low  indtfd.  The  value  of  the  dollar  might  easilv  have 
Invn  ten  times  what  it  is  to-day  and  'J.i  cents  might  have 
been  a  fair  ('  'v's  wage  for  the  unskilled  workingman. 

This  ridiculously  low  level  of  prices,  however,  would 
ti(»t  mean  anything  at  all  if  all  \ alius  were  in  the  same 
proportion.  If  the  necessities  of  life  cost  one-tenth  of 
(he  price  which  \\e  are  paying  to-day,  2.")  cents  per  day 
u  ages  would  be  as  satisfactory  to  the  laborer  as  $2.50  is 
under  present  conditions. 

109.  Ti'tnporari/  n'siilts  of  cliatiiic  of  monci/  sitppl//. 
While  it  makes  little  difference  whether  the  absolute 
[)rice  level  is  high  or  low  so  long  as  relative  values  are 
iinchanged,  yet  changes  in  the  price  level  are  likely  to 
have  great  economic  results  because  the  ])rice  of  every 
( oiiinioclitv  that  is  boUi2ht  and  sold,  docs  rwtt  chanue 
'  (lually  or  sinniltaneously.  Therel'ore  a  change  in  the 
general  price  level  is  likely  to  cause  a  general  change  in 


hi 


m 

m 


■>i;^3»^ 


8G 


MONEY   WO  HANKING 


III 


the  relative  values.  Kspeeially  is  this  true  of  credits. 
Jf  a  (Irhtor  lla^  i)r()iiiise(l  to  pay  a  creditor  ,$100  in  ten 
years,  and  il'  within  that  i)eriod  prices  have  chan<red  so 
that  the  SI 00  at  maturity  rej)resents  the  eciuivalent  of 
oidy  liaif  the  (juantity  of  ^oods,  the  creditor  has  in  real- 
ity received  only  half  as  nnich  in  value  as  he  loaned. 
The  fact  that  he  received  the  same  numher  of  dollars 
does  not  mean  anythino-  lu-cause  the  dollars  to  him  are 
valuable  oidy  as  he  can  cxchanL-e  them  for  things  that 
he  wants. 

^  ^  110.  Effcvl  of  increased  sup  pi//  of  ^oJd  traced  oiit.-- 
The  ])riiiciples  which  have  heen  stated  above  will  be 
better  understood  if  we  examine  the  eft'ect  of  the  addi- 
tion of  a  certain  (juantity  of  ..„1,1  to  the  stock  already 
oil  hand.  Let  us  follow  the  output  of  a  mine  and  trace 
out  the  ultimate  effects  of  the  new  gold. 

When  the  gold  has  been  refined  and  made  into  bricks 
it  is  sent  to  a  (iovernnient  assay  ofKce,  where  it  is  tested 
to  determine  its  purity,  and  "then   turned  over  to  the 
mint.     Theoretically,  under  a  system  based  on  the  free 
coinage  of  gold  anybody  can  take  the  metal  to  the  mint 
with  the  projyer  amount  of  alloy  needed  to  harden  it  for 
purposes  of  circulation  and  can  have  it  transformed  into 
coins.      Practically,  however,  the  gold  bricks  are  taken 
to  the  mint,  but  instead  of  waiting  until  the  gold  has 
been   made   into   coins   the  owner  receives  at   once  tlie 
money   e(juivalent     for    its    value.     The     person     who 
brought  the  gold  to  the  mint  now  has  the  coins  or  their 
e(|uivalent  in  some  other  form.      lie  will  either  spend 
this  money  or  deposit  it  in  a  bank.      If  he  goes  into  the 
market  to  luirchase  goods  o|'  any  sort  his  buying  will 
have   the  effect  of  bidding  iij)    pi-icfs   proportionately 
and  the  gold  which  was  mined  will  be  responsible  for 
wliate\er  ef}.  ct  has  bem  jjrodnced  on  prices.      The  mcr- 


SUPPLY  AND  DEMAND 


87 


(liant  who  received  the  money  uses  it  to  replenish  his 
>t()ek  and  his  huyin<r  will  tend  to  raise  the  prices  of  his 
j)iirchases. 

As  tile  money  eircuhites  from  hand  to  hand,  at  every 
(•\('hanu,e  it  will  tend  to  raise  ])rices.  This  continuous 
})n)cess  of  piiee  raisin<4,-,  s))readin^  thr()u<;h  all  the  dif- 
lerent  markets,  would  seem  to  have  no  end.  It  would 
seem  that  if  we  took  one  dollar  and  ^ave  it  time  and 
rapidity  of  circulation  enough  it  might  raise  the  general 
price  level  to  any  height. 

111.  Limit  to  tlic  price-raising  effect  of  gold. — This 
rediictio  ad  ahsurdum  is  answered  hy  another  pro|)osi- 
tion  which  counteracts  it.  Every  rise  of  price  reduces 
the  ])urchasing  value  of  the  dollar,  so  that  as  the  dollar 
continues  to  circulate  it  lose  its  power  to  exchange  goods 
ill  the  2xact  proportion  as  they  have  risen,  so  that  if  we 
conceive  prices  to  have  exactly  0  'ed  it  will  recjuire 
S'J.OO  to  exchang''  them  where  it  (  y  required  one  be- 
fore. The  result  will  be  that  there  will  be  an  ecpiilib- 
rium  of  prices  established  at  a  higher  level  than  before 
tile  inci-ease  in  the  (juantity  of  money. 

If  the  quantity  of  money  should  be  diminished  in 
.iinount,  or  if  the  (piantitv  of  goods  to  be  exchanged 
should  be  doubled,  there  would  be  a  lowering  of  prices 
to  correspond  on  account  of  the  increase  in  the  offei-ing 
of  goods  for  sale  without  the  corresponding  amount  of 
bidding  from  the  owners  of  cash  to  jiay  for  them.  The 
result  would  be  the  formation  of  a  new  level  of  ])rices 
at  a  point  where  the  offerings  of  goods  and  the  bidding 
of  the  holders  of  cash  would  balance. 

112.  Alternative  nfies  of  nexc  gohJ.  W  the  miner 
who  has  increased  the  moiuy  supply  of  the  country  with 
the  product  of  his  mine  should  choose  to  hold  the  gold 
coins  or  the  pa})er  money  ecjuivalent  for  the  gold,  there 


^^ 


88 


MON'KV  AND  BANKING 


w-.iil.l  he  no  cllVct  wlmtcN.r  ..n  prices,  jind  it  woiihl  l,e 
as  tlioiinh  In.  |,;i,|  s|,„V(l  away  \\w  n(,hl  WwU  or  had 
ntxcr  piodiicvd  the  yohl  at  all. 

However,  if  he  deposits  it  in  the  hank  its  effect  there 
will  l)e  to  increase  the  loaniiv  power  of  the  l)ank  and 
thereby   to  i.'icrease  the  piirchasiiii.-  power  of  the  bor- 
rowers of  the  l)anh  and  thus  afi'ect  prices  even  more. 
11.*}.   Widcspraul  cll'cct  of  ncxc  ^o/r/.- An  increase 
oi'  prices  on  account  vA'  any  laroe  addition  to  the  money 
supply  would  have  more  than  local  effect.     AVe  have 
seen    how    purchases    from    the    retail    dealers    would 
tend  to  increase  wholesale  prices  in  the  central  markets 
on  acco.nit  of  the  a(l.,itional   purchases  of  the  retailer 
to  replenish  his  stock.      In  the  same  way  the  iniluence 
would  extend  from  the  central  markets  io  the  producing' 
centers  in  this  country  and  abroad.     The  demand  for 
imported  no„d.s  \vould  be  increased  and  mdess  our  ex- 
I)()rts  happened  to  increase  at  the  same  time  the  result 
would  be  an  export   of  u„ld  to   foreinn  countries.      If 
the  .general  price  level  was  raised  in  this  country  there 
would  be  an  increased  profit  in  im|)ortinu.  ooods',  and  a 
correspondino-  decrease  of  profit  in  expoH.i„n-  them,  un- 
til, if  the  oohl  production  or  other  increase  in  the  supply 
(if  money  was  ^-reat  enouoh,  there  mi<.ht  be  no  exports 
at  all  and  we  minht  be  forced  to  settle  for  all  our  im- 
ports with  ^(jld. 

Followin<^-  out  this  principle  we  may  conclude  that  the 
only  advantage  which  a  country  derives  from  a  lar^'e 
production  of  o>„l,l  is  simply  that  it  is  the  fh'st  to  f^el 
the  effect  on  pr-'ces:  it  camiot  ixi)ect  to  retain  perma- 
nently any  more  than  its  proper  share  of  the  new  v.-ol(I  so 
lon^-  as  trade  is  free  between  it  and  foreign  countries. 
it  would  be  uiipossil)le  to  increase  permanentlv  the  sup- 
ply of  o-old  ill  tr 


us  country   without 


I'lvmo-  the  other 


SUPPLY  AM)  I)F..MAND 


89 


■ 


(Miiiitrics  llicir  pi-optr  pi'opoftioiialc  share  of  it  unless 
we  used  il  as  a  suhstitute  for  other  tonus  of  money 
which  were  letired  from  cireuhition  to  make  a  place 
I'or  it. 

114.  Comparkoii  of  effect  of  iitrrrasc  of  .sitpjili/  of 
^(ihl  and  paper  iiioiie//.  —  l''ollo\\iu_o-  out  this  |)rineij)Ie 
liMthir  in  eonneetion  \\ith  eredit  money  it  will  a])])ear 
that  it  is  im])ossihle  I'or  a  eountry  to  increase  its  su])j)lv 
nf  this  foi'm  of  money  and  kecj)  it  at  a  pai'its-  with  yold 
unless  thei'c  has  heen  an  increase  in  the  demand  I'or 
money  due  to  enlarged  \«»lume  of  husiness,  increased 
|)o|.M!lati()n,  etc. 

Suppose  the  (iovernnient  were  to  issue  $.'500,000,000 
new  United  States  notes  in  addition  to  the  $.'U().000,000 
already  outstanding  in  cireuhition.  Suppose  these  notes 
were  ])aid  out  hy  the  (iovernnient  for  extraordinary 
<  xpenditures  occasioned  l)y  some  <»'reat  puhlic  enterprise, 
Mich  as  the  Iniildin^v  of  a  canal  or  for  materials  to  carry 
on  a  war.  These  notes  Mould  go  into  circulation  and 
cause  the  same  rise  in  jjrices  as  an  ecpial  output  of  gold. 
The  higher  piices  would  attract  imports  and  discourage 
(\|)()rts  and  there  would  he  credited  against  us  a  dehit 
halance  which  would  have  to  ])e  settled  in  "old  sooner 
(ir  later.  In  this  way  the  issue  of  n.)tes  would  continue 
to  drive  gold  out  of  the  country  hy  attracting  into  the 
country  an  ecjuivalent  amount  of  goods  from  foreign 
countries  until  a  new  etiuilihrium  of  prices  throughout 
the  world  were  estahlished.  When  so  much  o()ld  has 
heen  driven  out  that  it  becomes  difRcult  for  the  hankers 
til  find  gold  for  export,  the  (Government  would  prohahly 
he  unable  to  maintain  the  new  notes  on  a  par  with  gold, 
and  there  would  apj)ear  all  the  j)henomena  which  accom- 
pany a  depreciated  currency,  about  which  we  shall  have 
much  to  say  in  a  later  chapter. 


III 


90 


MONFV    AM)    HANKINTr 


III! 

iNNt 

nil 


11.).  IIoxc  mucJi  moucji  is  needed  in  a  eoiinfn/^—ln 
the  campaign,  of  ISiM!  we  heard  a  n-nat  deal  in  this  coun- 
try ahout  tlie  scarcity  ol'  money,  and  onr  of  tlie  strongest 
aro-.nnents  of  the   Silver   Party   was  that  tlie  country 
needed  more  money  io  do  business  properly.     They  said 
that    o,„h1s  w<re   unsalahle   because   there"  was  not   the 
loney  to  ])urchase  them,     li    the  principles  whicji  we 
.lave  worked  out  above  are  true,  it  would  be  of  no  use 
\vii.!t(  vcr  to  increase  the  (juantity  of  money  in  the  coun- 
try iKcause  if  we  increased  tlie  amount  we  should  dimin- 
ish its  exchan<.ino-  p,nver  proportionatelv  and  the  net  re- 
sult would  be  that  our. $2.00  would  do  no"  more  work  than 
tiie  .<<1.0()  di.l  before.     \\\   might    'vcn  u„  so  far  as  to 
say  that  a  coimtvy  always  has  enough  money  to  take  care 
of  Its  business  needs;  however,  such  a  statement  would 
be  misleading  if  we  did  not  take  into  cons:deration  the 
ejTecl  of  fluctuating  prices  upon  industry. 

The  real  diflieully  of  which  the  siher  reformers  com- 
plained was  not  the  insulJicient  (luantity  of  money,  but 
the  low  level  of  eouiiiiodity  prices.  Tluy  pointed'to  the 
western  farmer,  who  was  compelled  to  acet>pt  less  than 
fifty  cents  a  bushel  for  bis  wheat.  'I'here  was  plenty  of 
mon<T  in  the  country  to  pay  for  the  wh.at  and' the 
fanner  was  really  complaining  because  of  tlu  low  price 
•  alher  than  because  of  the  lack  of  a  market  for  the 
wlicat.  If  everything  'he  farmer  had  to  iiurchasc  with 
the  proceeds  of  bjs  crops— sujiplies  for  the  family, 
wages  of  bis  liirv.l  labor,  taxes,  intenst  and  principal 
«•"  borr-.we.l  money,  wen  diminished  jiroportionatcly. 
be  would  have  had  no  reason  to  comi)lain.  The  trouble 
was  that  tin-  prices  of  these  things  did  not  diminish  pro- 
porti<.nately  will,  the  price  of  wheat.  In  the  course  of 
time  values  woidd  adjust  tliemsclves  In  ib-  -.-..-  .,,,, 
portions  as  before. 


SUPPLY  AND  DEMAND 


91 


IK!.  Price  changes  not  s/jnchionoiis. — In  the  long 
mil  (lie  <iuantiiy  of  money  has  little  effect  in  altering 
relative  values;  for  a  short  period  of  time,  however,  it 
lias  a  very  great  effect.  The  reason  of  this  is  that  some 
voiiimodities  are  very  susceptible  to  money  inthiences 
and  ies})()n(l  (juickly  to  changes  in  the  money  suj)ply, 
\sliile  others  respond  very  slowly.  Stocks  and  the  spec- 
iilati\e  eommoditits.  such  as  wheat,  cotton,  copper,  iron, 
1  ti-..  are  \eiv  easily  and  'luicklv  inlluenced;  wholesale 
prices  ))r()hahly  I'eel  the  elfect  much  sooiK.r  than  retail 
prices,  in  which  the  inlhience  of  custom  ])lays  a  greater 
part.  Wages  feel  the  change  consider:d)ly  later,  jO 
that  during  a  general  rise  of  ])rices  the  workingman  is 
al  a  disadvantage  in  ha\in<j  to  pay  moi'e  for  the  food 
and  other  necessities  before  his  wages  are  increased  cor- 
respondingly. Contracts  for  the  ])ayment  of  money  in- 
crease not  at  ail. 

'The  (juestion  of  the  sujj-ply  of  money  is  an  extremelv 
\  ital  one  because  ol'  its  bearing  upon  our  business  rela- 
tions due  to  the  variation  in  the  i-esponse  of  various 
\ahus  to  the  change  in  the  (iiiai\tity  of  money,  t'lianges 
in  the  supply  of  money  alter  the  I'elation  of  one  class 
to  their  advantage  and  to  t!ie  (hsadxantage  of  another 
class.  An  increase  in  \\\r  sujiply  of  niontv  j)uts  cred- 
itc's  at  a  disadvantage  and  favors  debtois;  it  increases 
the  ])rofits  of  Ihe  producers  of  raw  materials  at  the  ex- 
pense of  the  wage  earners.  iiioi(  i  speeially  to  the  disad- 
vantage ol'  the  recii>ients  of  fixed  incomes. 

1 17.  Stimiildtiiiz  effect  of  risin:^-  prices. — There  is 
one  effect  ol"  increased  money  s!i|)j)Iy.  the  benefit  (d' 
\>hich  has  no  corrcsjjonditig  disa<l\  anta^v  for  tjie  time 
being.     Hising  p<riccs  of  commodities  stimulate  industry 


.....I 


iT5crcusc 


n...   .1... 


,1    (■ 


I..1.. 


»i. 


..I . 


\V 


hich  enter  into  capital  goods.     This  increase  in  indus- 


.;^;B»lljfl 


()<-> 


:^ro^EY  and  bankixg 


trial  activity  leads  to  IJic  nnatc  r  production  of  wealth 
in  the  form  oi'  coiisunijjtion  i-oods  and  means  a  greater 
i)er  cai)ita  distri'  ition.  Therefore,  economists  have 
coneluded  that  a  condition  oi'  oradnally  increasing-  prices 
is  the  ideal  one  for  any  community  and  since  it  is  within 
the  }K)wei  of  a  community  through  the  aoeney  of  (iov- 
ernment  to  regulate  the  rise  and  fall  of  prices  throuo-h 
the  mani|)uIatioii  of  the  supi)ly  of  money,  it  is  possihle 
to  make  oreat  economic  in;|)i-ovements  hy  this  means,  as 
we  shall  diseox cr  in  a  more  detailed  examination  later. 

lis.  7/<Y/(7/o//.— There  is  as  much  to  fear  fron>  rising 
as  from  falling  ,„-iees  if  the  tendency  toward  higher 
pr  -  levels  is  allowed  to  run  into  speculation,  t!  over- 
expansioi.  (,f  eredit  and  the  inevitahie  collapse  which  fol- 
lows. Whether  it  is  j)ossihle  for  a  Government  to  so 
regulate  the  rise  of  prices  through  Ihe  manipulation  of 
the  supj.ly  ol'  money  that  the  evil  conseciuenccs  can  he 
avoided  is  a  matter  which  may  one  day  hecome  of  great 
iniportanee.  especially  if  the  unregulated  production  of 
gold  should  go  on  increasing  at  too  onat  a  rate. 

In  the  present  diaphr  we  have  seen  that  the  value 
of  gold  and  conversely  the  general  kvel  of  priees  is  de- 
termmed  hy  thr  supply  of  and  d(  niand  tor  money.  The 
value  of  money  at  any  j)artieular  moment  rejjresents  the 
eciuilihrimn  hetween  these  two  forces.  Kach  of  the 
forces,  however,  is  eom|)ose,l  ,.('  ;,  u,vat  numher  of  tend- 
encies. SouHtinies  lliere  may  he  ;,  particularly  large 
''•"i;uid  Inr  n,,|,|  j,,  ,,,.,!,.,.  I,,  ^.xcliaiim.  a  large  volurne 
••I'  prndn.v.  while  at  the  siiuu-  time  lli.'  demand  for  goM 
as  a  store  of  value  may  decline:  the  force  of  denwind 
"'"■••f'Te  is  iiie  tinai  nsuit  of  a  numher  (.f  ten.leneirs 
and  countertindencies. 

Ill>.    Sxcifliis      (if      lU-irrs.       .Vn      !■-!!•>>!!•;..>-      .--.f      4!... 
strength  of  Ihe  <lemand   for  m-mey  at    any   parlicidar 


SUPPLY  AM)  DEMAND 


93 


time  or  a  prediction  as  to  a  i'utiirc  dfiiiaiul  is  facilitated 
In-  the  fact  that  the  dian^es  occur,  not  ahni])tlv,  hut  in 
U-real  swinos.  These  orcat  swing's  in  the  vahie  of  irohl 
are  .sinij)ly  manifestations  of  tliat  oreat  hiw  of  nature 
\>y  which  all  |)ro^ress  occurs  rhythniically  and  not  stead- 
ily in  any  oiven  direction.  The  course  of  prices  on  the 
stock  exchange,  the  recurring-  periods  of  (lei)ressi()n  and 
prosperity,  the  ,iireat  cycles  of  rainfall,  are  examples  of 
tiiis  o-reat  natural  law  which  is  found  to  prevail  ^roncr- 
ally  throughout  the  universe. 

120.  Cmnulativc  effect  of  caniomk'  forces.- ~'Y\\ii  ex- 
planation of  these  (rreat  economic  swiiii^s  of  jjriccs  and 
values  is  to  j)e  found  in  the  cumulative  effect  of  the 
economic  forces.  We  are  all  familiar  with  the  oeneral 
pessimism  that  han^ys  like  a  cloud  over  the  eommuiuty 
during  an  economic  depression.  The  ohvious  fact  that 
die  existin^r  sujjply  of  m(„„1s  is  steadily  diminishing^, 
diat  tile  savings  deposits  of  the  j)eoj)le  are  increasiriir 
in  amount  in  conseciuence  of  the  hard  lesson  of  thrift 
which  the  jxople  have  learned  in  the  hard  times,  in 
^pile  of  the  steady  deterioi'ation  in  the  industrial  e(|uip- 
ment  of  tlie  country,  the  wearing-  out  of  the  rails  and 
rollin;^'  stock  of  the  railroads  all  lliese  factors  instead 
"f  inspirinn-  confiiUricc  I'or  llic  future  amonn-  husiness 
men  are  even  used  as  an  ari^ument  for  continued  hard 
1  .rues. 

When  the  inevitahle  demand  for  ^roods  uhich  has  tem- 
I'orarily  heen  delayed  finally  heoins  to  assert  ilsi'lf.  at 
tiist  slow  ly.  the  husiness  community  ^raduallv  heoins  to 
liope  that  prosp(  rity  is  returninu'.  As  the  prosperitv 
continues  the  ( lunulativc  effect  of  n  turnintr  confidence 
makes  itself  felt  in  ri^inu  prices,  and  since  an  ad\ancc 
::;  j/iur--,  r;i(,iFis  iai;:;er  jMi>iii>  io  .inximiix  owuiiio  an\' 
kind  (»r   pio|,erly   t  \e(  pt    ukmkv    itscll'.   tliire  arises   an 


,-,^^.W 


11 


tiff  £ 


U-t 


MONEY  AM)  HANKIN(i 


enormous;  (Icmand  for  income  yielding  property  of  all 
sorts,  even  that  whieh  i)roniises  to  return  only  a  specu- 
lative profit. 

When  industry  is  at  its  heioht  and  prices  have  l)een 
l)ut  to  record  hreakin^r  levels  everyhody  is  optimistic  and 
hopeful  of  si  ill  l)ett>er  conditions.  It  is  at  a  time  like 
this  that  the  careful  ohserver  will  note  that  the  produc- 
tion of  hoth  consumption  and  production  ^yoods  has  in- 
creased tremendously  and  will  likely  soon  surj)ass  the 
needs  of  the  conmiunity.  lie  will  note  that  the  hiu'.er  ^ 
prices  ^o  the  smaller  is  the  i)rospect  of  still  further  ad- 
vance and  the  nirater  the  prospect  of  a  recession  to 
lower  levels.  He  will  note  that  the  rate  of  interest  is 
very  hi«4h.  indicating-  a  scarcity  in  th«'  -uiJijly  of  loanahle 
funds.  His  conclusion  from  this  ?  of  affairs  will  he 
that  in  the  near  future  there  must  inevitahlv  he  a  "-reater 
demand  for  money  and  a  coiise(]uent  increase  in  its 
value.  He  also  will  remcmher  from  previous  experi- 
ence that  the  cumulative  e+lVct  of  human  cujjidity  and 
optimism  which  has  carried  |)rices  to  ahnormally  hiyh 
levels  will  have  exactly  the  reverse  effect  when  it  is 
turned  in  the  opposite  direction.  When  the  turn  comes 
and  the  downward  tendency  l)e^ins  a  corrcspondiu"; 
scranil)k'  to  dis])ose  of  ooods  and  to  ^et  money  in  order 
to  realize  the  increase  in  value  will  set  in. 

These  ^reat  swings  in  prices  offer  an  exj)lanation 
of  the  fact  that  for  hn\'^  periods  of  time  an  increased 
demand  for  money  has  se(  ined  to  he  accompanied  hv 
a  fall  in  value  of  money  instead  of  a  rise.  The  natuial 
etlVct  of  dema?id  in  this  case  is  simply  sus|)endc(l  for 
the  time  Ixino.  }„,t  whci  it  a^ain  asserts  itself  if  will  do 
so  with  far  more  than  the  ordinary  conse(iuences  and 
v.ihh>  mil  i.L  eariied  mucli  lower  tiian  liiey  otherwise 
would  he. 


fc^\ 


CHAP  IKR  VIII 


THEORY  OF   PRICES 


V  ■ .  *l 


121.  "Short"  sales  of  moncjj. — Every  buyer  and 
srller  whatsoever  is  a  speeulator  in  niniiey.  though  he 
may  not  realize  it.  Kvery  debtor  and  erefhtor  is  not  only 
;i  s|)ecnlator  i?i  money  but  lie  is  a  sjxenlalor  in  "I'n- 
tiH'es."  Kveiy  debtor  has  sold  money  short  in  exaetly 
the  same  way  as  a  sj)eeuIator  on  the  board  (  I'  trade  has 
Mild  wheat  short  when  he  has  eonti-aeted  to  deliver  a  eer- 
l.iiii  number  ol'  bushels  at  a  ^ixcn  \)v'\vv  at  a  future  time. 
lie  gains  or  loses  as  the  price  at  that  time  of  delivery 
lias  fallen  or  risen. 

It  is  an  axiom  in  the  speeulati\e  markets  that  there 
1^  no  better  guaranty  for  the  maintenance  of  ])rices 
than  the  existence  of  a  large  sh.ort  intertst.  the  reason 
lieing  that  those  ])ersons  are  ])otential  j)iircliasers  who 
iiiust  buy  within  a  gi\en  time  whether  they  wish  to  do 
^o  or  not.  'I'hus  in  times  of  ere<lit  exi)ansion  when  [ho- 
|)le  are  going  inti  debt  in  order  to  extend  their  business 
(ir  for  the  purpose  of  buying  something  which  they  hoj)e 
to  sell  at  a  higher  price  later,  a  large  short  interest  in 
money  is  being  created  and  as  the  time  of  maturity  aj)- 
proaehes  it  is  ine\ital)le  that  there  must  occur  a  scram- 
i)le  for  money  with  which  to  satisfy  the  credit  contracts. 

Vl'l.  "S<iinc\'niii-  the  shorts." — When  the  credit  ex- 
pansion has  extended  to  an  cxtraoi'chnary  degree  there 
.ire  not  lacklig  shrewd  bankers  and  cxix'rts  in  finance 
who  reah/.e  thj^'  au'.u'oac!'.!!!"  r!(  in;!!!:!  Inr  !!«m!!(\  !!!•*!!••*» 
the  ordinary  Inisiness  community;  these  men  (|uictlv  ac- 


96 


M0M:Y   AM)  1}.\NKING 


If 


ciiinulate  a  stoiv  of  funds.  Tluy  may  do  tills  to  such 
an  rxtcut  that  there  suihlenly  (k'\cIo|)s  a  coiuhtion  which 
ini^dit  ahuost  he  called  a  corner  in  money  and  a  scjucez- 
in^'  of  shorts  follows.  This  j)r()cess  of  •\s(iuet/in^>-"'  the 
money  shorts  is  more  familiar  under  the  name  of  a 
money  j)anic. 

A  man  who  finds  hirr.self  ol)liged  to  make  a  payment 
at  a  certain  time  has  a  choice  of  one  of  two  courses;  he 
may  either  l.orrow  or  he  may  sell  something  he  possesses 
ill  order  to  provide  himself  with  funds.  In  a  severe 
money  panic  it  is  practically  imjxjssihle  to  horrow 
money,  even  upon  the  most  select  collateral,  and  there 
have  lieen  days  on  tlie  stock  exchange  when  call  money 
ran  as  hi<4li  as  ISC  |)er  cent  per  annum. 

12;}.  Forced  selling.— Vudvv  such  conditions  the  only 
recourse  of  the  dehtor  is  to  sell  whatever  property  he 
possesses,  at  the  hest  price  olitainahle.  This  sudden 
pressure  of  sellino-  ,i])on  a  market  which  is  disinclined  to 
i)ny  will  iH'rmit  pi'ices  io  descend  to  a  level  which  would 
have  seemed  alisnhitely  ridiculous  a  few  months  previ- 
ous. There  are  not  wanting-  at  such  times  shrewd  peo- 
l)le  who  reaii/e  that  there  are  extraordinary  i,.ar<rains 
to  he  found,  hut  it  is  only  a  \'vw  of  these  shrewd  people 
M-ho  lia\e  the  means  to  huv  at  such  times.  The  <>Teat 
majniily  of  jjfople.  however,  do  not  recooiiizf  these  iiar- 
gains.  even  if  they  have  the  I'unds;  and  instead  of  huy- 
ing  in  a  market  which  offers  them  a  practical  eertaintv 
of  an  increase  of -J.-)  to  100  percent  on  their  investment, 
they  prefer  to  kecj)  it  stored  away  until  the  strinoency  as 
well  as  the  hargains  have  become  a  thitiir  of  the  ])ast. 

124.  I*t()/)lc  hccnniiif/  better  educated  There  was 
evidence,  howexcr.  in  the  panic  of  IOO7  that  the  peoiih 
ii.  gLiiCiui  .in  u, 111111114  10  iaixe  a(i\antaye  oj  tjie  oec'a- 
sional  opportunities  which  these  great  swings  of  prices 


TiiEoKv  or  rincKs 


97 


nlVc  r  tliein.  The  ixxiks  of  the  ^reat  corjxjrations  siicli 
,is  llif  riiited  States  Stfcl  Corporation,  tlie  I'tniisyl- 
\;iiiia  l{ailroa<i  and  liundrrds  of  otliei-s.  ^liow  a  urtat  in- 
crease in  the  nninlier  of  stoekliolders  after  Oetoher,  11)07. 
'I'liis  is  a  most  hopeful  si-^ri  that  in  the  future,  as  the 
prople  i)eeoine  hetter  e(hieated  in  finaneial  atl'airs.  thi' 
lliictuallons  in  \alues  will  I)eeonie  le^s  and  less  pi-o- 
piHineed.  It  would  i)e  iinpossihlc  to  o\  erestiniale  the 
uieat  eff'eet  in  this  dii-eetion  wjiich  the  I'eeent  hn\ue  out- 
put of  literature  on  financial  subjects  has  hroun-ht  aliout. 
12.5.  General  price  level. — Whenever  we  have  spoken 
of  the  effect  of  ciianoes  in  the  value  of  money  on  prices 
we  have  always  sj)()ken  of  it  as  a  clianoe  jn  the  "^'•eneral 
price  level/'  The  risino-  or  falling-  of  prices  due  to  a 
iliange  in  the  money  sup])ly  or  demand  is  slow  and 
Ui-adual,  while  the  changes  in  prices  due  to  causes  af- 
fretiufT  the  sujjply  and  demand  for  goods  may  he  sharp 
iiid  sudden.  Fui'thermore,  the  prices  of  some  floods 
may  he  rising  while  the  prices  of  others  are  falling. 

ri().  Price  iahle.s.-'lw  the  first  place,  therefore,  it  is 
necessary  in  estimating  the  effect  of  money  to  (  liminate 
all  those  causes  which  account  for  changes  in  the  prices 
of  goods.  In  order  to  observe  the  changes  iti  the  gen- 
;  ral  price  level  price  tables  have  l)een  constructed.  The 
ideal  price  table  would  of'  eomsi'  repiesent  the  average 
]»rice  changes  of  all  the  commodities,  the  exchange  of 
which  creates  a  demand  foi-  money.  Since  this  is  im- 
possible the  most  practical  method  is  to  take  a  certain 
iiumbei'  of  repri'sentative  commodities. 

127.  Mail//  coiiinuxliiies. — Such  a  table  must  not  be 
ronlined  to  a  few  commodities  nor  io  one  class,  because 
there  might  !h'  special  eausts  for  an  adx.mcc  of  ni-jces 
i'\'  that  |(;u'licular  class.  .\n  iiislaiicc  of  Ihls  wduld  be 
i!i  com?nodities  re|)res('nt mil;  naiin'al  resoui'ces  and  raw 


98  MOM.V   AM)  HANKING 

materials.  A  price  table  composed  of  wheat,  corn,  lum- 
ber, coal,  cotton,  would  show  a  rise  in  price  in  the  last 
ten  years  much  greater  than  could  be  attributed  to  anv 
chano'c  in  the  value  of  money.  The  reason  tor  such  a 
change  would  be  the  increase  of  pojnilation  relative  to 
tiie  suj)ply  of  natural  resources  or  the  area  of  land 
producing-  them. 

On  the  other  hand,  if  we  made  a  price  table  composed 
of  solely  such  articles  as  silk  cloth,  watches,  articles  man- 
ufactured from  tine  metals,  etc.,  we  should  find  that  the 
average  price  had  [)robably  fallen  within  the  last  ten 
years,  the  reason  beinn-  that  with  the  improvement  in 
labor-saving  machinery  and  the  greater  skill  of  modern 
workmen  the  cost  of  production  was  considerably  dimin- 
ished, so  that  tile  fall  in  jji-ice  would  more  than  oft'set 
any  diminution  in  the  value  of  mojiey. 

128.  ExdDipJc  of  price  ttthle. — It  is  therefore  clear 
that  a  price  table  should  be  composed  of  such  a  variety 
of  commodities  that  the  influences  affectino-  the  value  of 
the  })articular  classes  will  counterbalance  each  other. 
The  j)roposition  has  been  stated  above  that  a  general 
rise  of  values  is  absolutely  impossible  in  the  nature  of 
things,  since  value  is  a  ratio,  and  it  is  im])ossil)le  to  alter 
the  relation  of  things  by  e(iual  changes  on  each  side. 
We  give  below  a  samjde  in  outline  of  a  price  table  con- 
structed to  show  the  price  changes  over  a  ])eriod  of  two 
years: 

1890  %  1892  % 

Wheat ^     1.00  100  I     1.10  110 

Caftlp .^O.OO  100  (in.dd  1  .>() 

Knives 20.00  100  1,>.(M»  75 

Silk  clolh l.iO.OO  100  K'0.00  80 

4)  400  :J85 

100  9fi-i.4 

In  this  table  we  have  made  a  hypothetical  list  of  the 


TIIKOHV   OF  I'HICKS  99 

prices  in  1890  and  another  for  the  year  1892.  These 
[)i-iees  should  i)ieferah|y  re])reseiit  an  averafrc  for  a  pe- 
loid of  time  in  ordei-  to  avoid  any  accidental  lluetua- 
tions  due  to  the  season  or  otlier  tenmorary  causes.  The 
piiees  for  1890  have  l)een  made  the  hasis  at  100  per  cent 
and  the  increase  or  decrease  calculated  witji  reference  to 
this  hase.  This  table  will  show  that  while  some  prices 
lii\e  advanced  othei's  have  fallen  so  that  the  «feneral 
k\el  is  dinn'nished  .'J-"' ;  per  cent. 

129.  "Wcii^lilin^"  of  price  tables.— U  may  l)e  ob- 
Mcted  that  in  this  table  we  have  giren  exactly  as  much 
importance  to  knives  as  we  have  to  wheat,  whereas  we 
know  that  a  chaufjre  of  a  cent  a  bushel  in  wheat  would 
have  vastly  greater  etrect  on  the  demand  for  money  than 
a  change  of  100  per  cent  in  the  value  of  knives.  To  cor- 
rect this  difficulty  a  system  has  l)een  devised  for  "weiglit- 
iiiy"'  the  xarious  items  in  a  ])rice  table.  The  principle 
of  ■'weif^hting"  is  to  find  some  basis  of  estimatiuij;'  the 
amount  of  the  particular  items  and  exchauoe  either  on 
the  basis  of  total  j);-')(luction  or  consumption. 

To  wei<>ht  our  jjrice  table  above  it  would  be  necessary 
ill  arrange  the  four  items  so  that  wheat  would  have  an 
inliuence  on  the  result  let  us  say  one  hundred  times  as 
-reat  as  km'ves:  thai  cattle  would  have  an  importance 
lifty  times  as  great  as  knives:  that  silk  cloth  has  an  im- 
portance say  ten  times  as  great  as  kr)ives.  The  table 
modified  to  conform  *^o  this  weighting  ari-angement  is 
given  below: 

18!)f)  ISO  J 

v.'iicit 100  X  sp    1.00=10(1(10      .-«    i.io— noooo 

'■ittlc .40  X       .jO.OO^r    ,)(I00  ()().00=r    (jOOO 

Knives    Ix       JO.OO  =       100  l.").()0=        7,5 

Silk  cloth 10  X     l.>0.00=    1(100  l.'(M)0=;      800 

I'll  16100  17875 

1007o  111   i  161% 

While  the  weighting  of  IJie  price  table  seems  to  pro- 


III 


100 


-MO.NKV   .\M)  HANKING 


m 


(luce  a  very  oreat  eflVct  upon  our  .sample  tal)le,  yet  in 
inakirijU,-  actual  tables  where  the  numher  of  coniinodities 
is  much  greater  the  (litfereuees  shown  by  simple  and 
wei<Thte(l  price  tables  are  very  slioht,  and  since  the  total 
result  of  any  price  table  is  but  an  approximation,  it  is 
doid)t('ul  whether  the  weighted  ])rice  tables  are  much 
more  accurate  than  the  simj)le  i)rice  tables. 

130.  Advduid^is  of  i^-ci<^litinii: — The  principle  of 
weighting  is  important  when  changes  in  the  price  level 
for  certain  purj)()ses  are  desii'ed.  For  instance,  if  we 
desire  to  know  whether  the  average  cost  of  living  for 
the  workingman's  family  has  increased  or  decreased,  the 
])rice  table  should  not  oidy  show  the  items  which  enter 
i?it()  the  consumjjtion  of  tlie  family  but  tliey  should  be 
weighted  to  show  their  inijiortance  in  the  family  budget. 
Tables  constructed  upon  this  })rinciple  were  prepared 
by  Professor  Falkner  in  the  most  elaborate  investigation 
of  prices  that  has  ever  been  undertaken  in  this  country. 
The  report  was  })repared  for  a  Committee  of  the  Sen- 
ate.' 

131.  Falkner  price  table.— Yor  this  table  lists  of 
j)rices  of  00  commodities  were  covered  from  1840  to 
ISDl;  and  223  commodities  were  covered  for  the  ])eriod 
from  1H()0  to  1801.  The  investigation  was  conducted 
with  great  care  and  expense,  the  prices  being  ascertained 
from  an  examination  of  merchants'  accounts.  Several 
tables  were  i)repared  from  this  data  which  are  repro- 
duced herewith.  In  the  first  table  the  average  per- 
centage of  ])rices  for  various  groups  ol'  commodities  is 
given  separately,  the  year  18(;o  being  taken  as  a  liasis. 
or   100  \)vv  cent.      The  average  ])rices  of  all  the  com- 

'  Ifcpnrt  1)V  SciKitor  Aldricli  for  tlii'  Coniiiiitlce  nn  Fin.inrr,  Mnn-h  'A,  1>;0i, 
Senate  Oocutiicnt.  5 :nil  Cdiijfress,  seeoiul  Session,  No.  1394,  "Wholesale 
Prices,  Wages  and  'rriaisjinrtation." 


THKOHV  OF  PHK  r.S 


101 


niodities  taken  had  decreased  to  '.).:.-'  per  cent  in    1891, 
an  avera^-e  of  7.8  per  cent. 


FAI.KXKU  PRICK    lAIU.I': 


c 


be 

c 


J2 

"is 


u 


■«,i 


fi  2         1 

■^  fa          u 

l-K» 96.()  110.7 

I'^H in.  I  11:5.1 

i'^y- h-'.!)  10(1.!) 

1-^1:5 79.3       <W.!I 

l'"^^ SI. 6  lOJ.O 

I"!'' 87.3       97.1 

|''^»i ,')|..(i     9,).:? 

I'-V7 9t-.7       97.fi 

I>1S M5.5       K7.,i 

I>^t9 79.0       8.'..' 

l^.iO 85.5       91.3 

IS51 9().(j       91..7 

185.' 88.7       88.7 

l^^fU 101. ,>        98.() 

l^5t 10,-,.9       1)7.}. 

1S55 111.8       9U 

1^5G 110.).  Kio.ii 

1857 117.5  lOfi.O 

1  ^^58 9 IM       iis.O 

1>'59 'Ji^.S  101.1 

iMiO lOO.O  100.0 

1>'<>1 95.8  !)1..9 

!•'((-' ll.).!  IJt.I 

i^(i3 i:5:i.o  loi.i; 

IMil 1G5.8  .'(io.7 

l>f>5 .>1().5  J99..' 

i^'iifi 17;i.s  .).'(i.ti 

1^^1)7 l(l,{.9  179.9 

iS(i8 Kii..'  IKi.s 

!''li9 l(i.>.9  U7.5 

l'-70 153.8  l;!H.t 

!^71 1(J9.3  l:i:i.3 

i-'7i 133.3  113.0 

l'^73 l.Hj.H  13ii.9 

l''7V 131.5  l.'7,9 

!>^75 130.5  l.'O.l 

:-:7 I.>o.;{  101. M 

1-T8 107.0  |i;i.,> 

1^79 97.tj  91.1 


o 

w    "-" 

—  -Z 

L- 

C   w 

~^ 

&< 

133.5 

110.0 

Q 

1  15.8 

1^ 
1UI.1 

117.1 

< 

395.8 

llfi.S 

-'08.9 

l.'3.7 

111.8 

111.3 

ll(..l 

117.1 

115.8 

-'o.'.o 

11S.7 

10S.8 

131.(1 

1  Iti.l 

170. (i 

107.8 

1S7.5 

1 1  1.7 

105.1 

1  .'  1  .  1 

100.3 

1  .'A.:, 

.01.5 

119.7 

1,13.3 

103.0 

lift. 7 

lo.'.3 

l.'9.5 

101.9 

.'39.fi 

110.8 

lOfi.7 

l.'l.o 

I(i.'.3 

1  11.8 

10.'.8 

1  i:!.s 

11(1.9 

lod..' 

I. '3. 9 

lll.i* 

II  1.0 

lOfi.l 

110.7 

l.'o.d 

Ids..' 

1 1  J.:> 

1J0.3 

l.'l. 7 

10(i.5 

lOfi.l 

119.7 

105.3 

113.0 

1-'1.7 

l-'5.(i 

101. -V 

loo.u 

l.'1.9 

97. (i 

II  1.0 

1  .'0.5 

109.8 

9h.7 

1  ().'.() 

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10.'..' 

1  J.i.ti 

I  .'5.(i 

lf)7.7 

10. '.3 

97.3 

119.-' 

97..' 

1J5.S 

1  .'0.0 

10.'.7 

105.9 

93.5 

117.7 

100.1- 

111.;- 

111.9 

100.5 

10.'.7 

lOl.fi 

l-'-\8 

103..' 

107.0 

118.7 

109..' 

lf)9.1 

10(i.8 

l.'5.(i 

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110.7 

l.'l..' 

10-.  1 

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l.'l.l 

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1(J3.1. 

1.'9..' 

I.'l..' 

115..' 

113.1 

l.'fi.t 

115.3 

10-'.8 

135.5 

115.5 

l.'l.fi 

113.; 

113.3 

no,! 

105.0 

l.'fi.S 

llfi.S 

110.0 

1 1  -'.5 

lll.t. 

101.3 

103.8 

llfi.O 

los.7 

97.1 

I0I.8 

98.8 

100.1 

9>H.7 

101..' 

103..' 

loo.s 

100.  J 

100.0 

100.0 

100.0 

100.0 

100.0 

KJO.O 

100.0 

103.5 

10.'.5 

108.9 

101.3 

9(i.8 

100.7 

IflO.fi 

97..' 

117..' 

1  19..' 

IKi.l 

89.5 

103.7 

117.8 

107.1 

110.0 

177.1 

1  If). 5 

l.'3.1 

l.'9.1 

lls.(i 

180.J 

179.8 

J  .'1.3 

170.3 

Ifil.fi 

151.1. 

190.5 

.'37.8 

191.1 

H.'.l 

-'71.(i 

1M.1 

■.'o.'.s 

.'l(i.8 

.'80.5 

171.1 

lM(i.9 

-'30..' 

1S5.3 

171.0 

191.0 

19(i.3 

If)  1.3 

178.8 

-'11..' 

159.1 

ll.l.l 

1  7-'..' 

-'18.7 

150.5 

17)-.3 

177.9 

131.9 

Itit.l 

1fi0.5 

JOfi.S 

111.3 

lf)5.9 

UiO.9 

l.'0.7 

l<i.».3 

1.53.5 

i9i;.5 

l.>7.8 

118.3 

119.fi 

l.'l.fi 

118.7 

1  l-'.3 

lU.l 

1. '.'..' 

151.1. 

139.4 

l->8.5 

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1  1!)..' 

i.'s.o 

l(i(i.9 

131.0 

ir.u 

13.'.7 

138.8 

131.fi 

l.'O.S 

171.9 

in. 5 

loil.I 

131.1. 

137.5 

1  19.«) 

l.'l.l 

151.9 

14-fi.8 

109.5 

l.'9.8 

133.0 

15().5 

117.5 

1 13.7 

lU.-' 

95.0 

I. '.'.9 

l-'7.6 

1  Hi'. 

] '.  1^  1 

:'?7.3 

K'l.H 

H7.-- 

;  ;  \   J 

i  i'p.i 

los.o      100.0      l.',-,.8     1TJ.3 


93.0 


79.0 


118. 


9.'.1      llii.s     HI..' 


M.3     111. 


95.3       88.t     115.1      110.9       68.(!     lO.'.l 


110.9 

101.3 

96.6 


IH 


i02 


:\ro\i:v  and  it wkixc; 


o 


y                  o       ^        3        %^     ■=.-      -        --z      '      ~ 
_^ ^ ^  ^     P.       ^        c       ~        5     < 

[!;:;'' !';'■;'  '"^-^  h)o.~9«;3"i:{o.9~Yi31~85.71o9.h  i,.,;., 

^'- '^.^      "'-^     I"-      ^-.'     'ii:i      !)s.I      77.,-,     ii7.:i     i.m.d 

^^;^ ';:-l  ^l-':  ^"•"  '--l  l^'i"  ^'if  7<U  yr.i  y;^:., 

'^''1; ""•■'  ^•'•l  Wi-'  TVh  l.'S.-,  s.\.\)  (jsi.  ul;i  (,!., 

^;;' '"^-f  ^^•'  *'«•"■  'I-!'  l-''i-5  K{.(i  (iti.t  h^.o  y.Mi 

r^^,*^ '""^  >'^■'  i'l.i)  7l.y  l.'t.H  Wi.d  ,,,;.y  sy;{  yi- 

^^  '"••'  ^■<-'*  !•'■;<  '^.i'  1^1.0  J'S.s  r.i.o  sh.s  y+'} 

^'" '"^■•*  ^-'-^  !'•'■'  -i.-'  i-':5.:  ^r.y  .ly,^  hy.7  y.';} 

^"^"^ i'>->-»       ^l-l yi.U 7t.D     1J.>.3       H(i.:{       70.1       95.1       9.'. J 

Til  the  second  taMe  we  Imve  a  taljulation  of  the  .same 
data  in  Mei<ilited  i'orni.  In  the  eoliiiun  headed  II! 
pereentaoe  uiven  represents  the  averane  I'o,-  all  artieics 
aeeordino'  to  their  imj)ortanee  in  the  hudoets  of  the 
averao-e  family.  In  the  eohimn  headed  I  \'  the  author 
attempts  to  reach  a  s^J!'  'v^dier  |.')!nt  of  aecuraey  hy 
assumin^r  that  the  articles  covered  in  the  data  represent 
over  (;8.(;  per  cent  of  the  total  e.xpenditnres  of  each  fjuii- 
ily.  The  difference  in  resnits  |)rodnced  hy  these  dif- 
ferent methods  seems  to  I)e  rather  small. 

l-AI.KNKK   l-iUCK  TAIil.F,   WKRiHTKD 

—  i  "pit*  -nib    i 

.i_  a '"  •=  'i.  y--=  —  •• 

i<  t^rf  'i  c'^-~ 

i'  «  <a:  -i  I  =  =  t  .i  ^  =  '  -= 

^  <    '""'''  =  =  ---. 

»S^^ loij; 89.3  Si 


THEORY  OF  PRTCES 


108 


n 


Illli.!) 
lO.i.T 

lOli.O 
99.  t 

9:{.o 

91.!l 

a.'.ti 

91..' 
9i.J 
9->.l} 
92.2 


TI 

Simple    arithmetical 
averages.     All   ar 
tides. 

\^n 

101.9 

Isl.j 

.    lo'  8 

Istfi 

KKi.l. 

i-^t; 

10  ;.5 

IHIS 

lOi.t 

^^V^ 

98.7 

IVH) 

ii)-'.;{ 

is.H 

IOJ.9 

IKVJ 

.    1(» '  7 

ls-,:5 

109  1 

l^.U 

ll-'.9 

I'^j.j  .. 

ii:i  1 

lS.i(J 

li;5-' 

ls,-,7 

1 1J.5 

ls.-,S 

101  8 

is.">y 

100.  J 

IXiO 

loo.o 

isiil 

.    100.6 

'^(L' 

117.8 

Vi 

118.6 

■ii 

190.5 

1  Sli,") 

. .    .    .    .'16.8 

IMilJ 

191.0 

1S()7 

17-'.3 

!S():4 

ICO  5 

1H()9 

iJJ.a 

ISTO 

1  t.'.a 

ISTI 

136.0 

IS-.' 

1:58.8 

IHT3 

137.5 

1H?4. 

13,5.0 

1s7j 

U'7.6 

IsTO 

118.3 

1>77 

110.9 

1S78 

101.3 

1S79 

96.6 

ISSO 

106.9 

1S«1 

105.7 

ISH3 

108.5 

1  *>-:5 

106.0 

i^'sl.  . 

99.4 

1 SS,') 

93.0 

1  SS() 

91.9 

ISS7 

95.6 

!  --SS 

91.3 

1 SS9 

94.3 

1S90 

9:3.3 

li>91 

93.2 

it.; 


M) 


89.8 

9.'.1 

96.7 

96.7 

9-'.0 

88.9 

9.'.6 

99.1 

98.5 

103.4 

103.4 

106.3 

108.5 

109.6 

109.1 

lO.'.O 

100.0 

95.9 

103.8 

133.1 

149.4 

190.7 

160.3 

145.3 

150.7 

135.9 

130.4 

134.8 

133.3 

119.9 

1 30.5 

119.8 

115.5 

109.1 

103.1 

96.6 

103.4 

105.8 

106.3 

101.5 

101.8 

95.4 
95.5 
96.2 
97.4 
99.0 
95.7 
90J 


^  E  J;  g 

K  _ 

■    v:  ti  .  -  {i 

~  ^  c  ^  — 

'Z.  ^  ^  .  — 

!:  -S  "^  c  = 

-  C  c  fc  5- 


85.0 

88.3 

95.3 

95.3 

88.3 

83.5 

89.3 

98.6 

97.9 

105.0 

105.0 

109.3 

113.3 

114.0 

113.3 

103.9 

100.0 

9J.1 

lOl.l 

133.3 

173.1 

333.3 

187.7 

165.8 

1 73.9 

153.3 

144.4 

136.1 

133.4 

139.0 

139.9 

138.9 

133.6 

113.6 

104.6 

95.0 

104.9 

108.4 

109.1 

106.6 

103.6 

93.3 

93.4 

M.5 

98.5 
98.7 
94.4 


ymmM 


104 


MOXrv    AND    BANKING 


V.i'2.   II ',()},    prirc.s   (hirhi,/    Ihc    Civil    ff'ar.      It    will 
''^^'    n..ti(r<l    tliat     t!ir    pri.T-,    ,|,,ri,,o.    [U,.    c'lvil    War 
I'(Ti(.(l  an-  extremely  iiiuj,.  the  pereeiita^e  lor  llie  vear 
18(;:,bcin:4  i>l(;.8  per  cent.     This  extraurdinarv  rise  is 
due  to  tlic  faet  that  the  prices  were  ^aleulaied  in  (lci)r(- 
eiated  i)ai)er  money.     AVe  liave  inserted  'rai)le  Xo.  4 
shouino-  tlie  a\erane  prices  rechiced  to  a  <rold  basis  duv- 
in,U'  the  period  when  <^-reenhacks  Mere  depreciated.    This 
table  will  show  t„  what  extent  the  extraordinarily  hioh 
prices  of  the  Civil  War  were  ,hie  to  the  inflated' pap'^er 
currency.     As  we  have  explained  elsewliere,  most  of  the 
people  at  that  time  did  ]iot  re<rar(.  (he  paper  currency 
as    depreciated.    b„t    thou^'.t    gohl    was    appreciated.'' 
The  fact  th  it  then  was  nolhino-  connected  with  tiie  sup- 
ply and  demand  of  commodities  in  General  which  could 
account  f(.r  the  more  than  douhlinn- (,f  the  prices  in  the 
year  180.5  is  evidence  that  the  cxtrt  ine  In.  tualion  of 
Jtrices  w.is  to  doe  I,,  iii<.n'\   ratlu  )■  r     m  to  ooods. 

The  figures  ^yv  have  .pnk.  n  ..j  .,s  perrenta-es  are 
usually  calle.l  nulcx  nnmi.ers  Th- v  priee  tables  pre- 
pared by  Professor  Falkncr  were  continued  in  the  -l^il- 
leun  of  tlie  Department  of  Labor,"  ^  and  the  index 
numhers  for  the  simj)le  table  for  the  pc  riod  from  18!>1 
to  the  year  11)10  are  ^rjveu  on  tlie  follovvin.r  pane: 

1  The  .l,-iii.iti(l   for  (•      ^mnl.ark  as  moncv   in   IS.i.'  must  <r.t.iinK-  Invo 
Keen   ...u.h     ..s   ll,..„        .(    I,,.,,,,    „,e   ,|,.„.,,„.,-  ,„r  p.l.l   i„   ,  re--       l\'ars 

-Sr.-  "llMil.tii.   for  tix-  IVi.artiM.rit' ..f  l",J,„r"  for  MHrcli  of  ,,,.1,   v.... 

iiie   IJ.  urinient   of   I.«|,or  Ims   nmintaiiird    a   price   fahi.-   in    its    i,i,ll,.tin 
«rranj:r,l  on  a  basis  .lifT.-rcnt  from  that  of  t.u-  Falkncr  tHi.k'r. 


ifi  i 


THEORY    OF    PRICES 


105 


COMPAHISOV    Ol'    VARIOIS    lltlCK    TABLES 


2 

o 

o 

1    . 

ll 

I: 

mis 

u 

s 

^ 

11^ 

ml 

I-- 

f9: 

C  So 

c  ao 

1-^ 

u 

^ 

U' 

tc 

■M 

(American) 

(English) 

(Gcrnian) 

-liO 

100. 

99 

123 

131.0 

Mil 

100.6 

98 

1.'4 

118.1 

4>- 

ISfii 

M1.9 

117.8 

101 

131 

122.6 

.M_ 

|S(i3 

10:.'  1 

148  6 

103 
10,-- 
1(11 
102 

159 
172 

ir.2 

162 

12J.,> 
120,3 
122.6 
125.8 

)^»,'      ^ 

Isiit 

..  .    122  r> 

100  5 

^pta 

1  H(i,  ■) 

100  3 

■^1(>  8 

jp..zi 

mm 

13C.;J 

191.0 

+        ; 

1  S(i7 

1J7  9 

IT  '  ' 

100 

137 

1  '1  4 

; 

IsiiH 

11.5.9 

Kid.,) 

99 

122 

1 22.0 

-I       ■, 

lS(i<) 

ii:j.-» 

i,;3..> 

98 

121 

123.t 

'       f 

IhTO 

117.3 

142.3 

96 

122 

122.9 

i^ii 

\22.9 

1 36.0 

100 

118 

127.0 

ISi.' 

]  27.2 

1.38.8 
137.5 

i;tj.o 

109 
III 
102 

129 
134 
131 

135.6 
138.3 
13(i.2 

is7;j 

122.0 

•"' 

I**74 

119.1 

l!S-,> 

113.1 

127.6 
118.2 

90 
95 

126 
1;^ 

129.8 
129.3 

ISTfi 

lOt.S 

-1      ;- 

I>T" 

KU.t 

110.9 

94 

193 

127.7 

1S78 

99.9 

101.3 

87 

116 

120,6 

IHT9 

9(i.6 

96.6 

83 

100 

117,1 

|s»0 

106.9 

88 

115 

121.9 

IHHI 

lOJ  7 

85 

108 

121.0 

]HH-3 

lOfl.5 

76 

111 
106 
101 

122.1 
122,2 
111,2 

lhS3 

106.0 

HH4 

99.4 

1^8j 

93.0 

79 

95 

KIM.T 

IhHIi 

91.9 

69 

99 

104,0 

I«H7 

92.0 

68 
70 

94 
101 

102,0 
102,0 

isrtrt.   ... 

n.2 

1^H!) 

9*.i 

12 

99 

106.1 

1 «!)() 

92.3 

11 -.9 

72 

102 

108.1 

H91 

92.2 

111.7 

106.1 

10,5.6 

96,1 

93.0 

7i 
68 

68 

63 
62 

101 
97 
96 
9.5 

87 

109.9 

isni 

H7.6 

is'iu 

87.2 

I««!U 

79.3 

isit.i.  . 

77.:2 

IH(»(i. 

74.0 

90.4 

61 

91 

iy»- 

74.0 

8!;.7 

62 

88  S<hll 

)itz 

i 

ISOH 

77.1 

93.4 

64 

8fi  (liMh 

.•   1900) 

1H)»9. 

83.9 

101.7 

68 

87       (( 

iprinan) 

ii 

UhH). 

91.2 

110.5 

75 

97 

100 

m 

1!»()1 

m.s 

108.,S 

70 

97 

94 

St^ 

1 !»().». 

93;? 

112,9 

69 

89 

93 

i!>o;j. 

9:J.7 

113.6 

60 

91 

94 

- 

mot,. 

93.3 

11.3.0 

70 

1(H) 

94 

r- 

It 

ni(»i 

1U.9 
lii.5 
li9.A 
122.8 

72 
76 
79 
74 

97 
106 
!!4 

10.i 

97 
106 
11.1 
107 

fr,i 

■&- 

I!t06..    ,. 

iiH  j 

H>ft7 

mm  1 

1  'Km 

■„': 

■P^ 

126.5 
131.6 


74 

78 


100 
109 


105 


lOG 


MOXF.Y  AND  HANKING 


l.'W.  Forcio)!  price  ta})lcf;. —The  index  minibcrs  given 
in  the  last  three  eohnnns  of  the  tal)le  are  reprodueed 
from  the  most  imjxjrtant  lorei^n  investi<>-ation.s.  The 
Sauerheek  and  Economist  tables  are  Kn<4!ish,  the  Soet- 
beer  tables  are  (iernian.  Tiie  table  of  Mr.  Augustus 
Sanerl)eek  was  pnblisiied  in  the  Journal  of  the  Hoi/nl 
Statistical  Socicf//.  His  indexes  are  eonijjuted  by  a 
sim])le  iinweifrjited  arithmetieal  average,  lie  lias  en- 
deavored to  arrajige  a  limited  number  of  eommodities, 
all  of  whieh  rejjresent  raw  jjroduets,  in  classes  in  such 
a  way  as  to  be  e({uivalent  to  wtighting. 

The  Ecomniiist  *ables  have  the  distinction  of  being 
the  first  to  be  coi..,  led.  Twenty-two  articles  oidy  are 
emi)loyed  in  this  table  and  the  (juotations  are  those  of  a 
given  date,  either  the  first  of  .January  or  the  first  of 
.Julv  on  the  averages  for  the  year.  The  commodities 
arc  chosen  disproportioiKitely.  tjicre  })eing  out  of  the 
twenty-two,  four  in  which  cotton  is  tlie  })rincipal  ele- 
ment. 

The  German  tablf  of  Soetbeer  was  fre(|uently  re- 
ferred l()  in  the  Silver  Controversy  in  this  country  in 
IH!M;.  The  iiumb(  r  of  coinmodities  was  over  three  hun- 
dred and  the  result  represents  the  simple  unweighted 
arithmetical  average  on  the  basis  of  the  vears  lSt7  to 
1S.)«). 

As  we  have  indicjited  b(  fore,  the  value  of  the  study 
of  the  science  of  money  and  currency  is  the  understaud- 
nig  it  gi\es  ns  ..f  the  significance  of  price  changes  and 
the  d.ita  I  rom  uiiieh  j)rc(lictions  as  to  tlie  course  of  prices 
^'•"'  '"■  '";"I<-  it  is  therefore  important  t(.  get  clenrly 
111  mind  the  m;iin  points  of  the  two  j)reeeding  chapters. 

In   the  first   j)l;iee  a  g,ii,.ral   ,  ise  in  tli.    prices  of  all 

'  ""  '*•••'  -"i^'»  •  iC't'N  iiiiiir.iirs  Tit.il    iln    rcMsiin    is  to 

be  found  ina  eh:tnM-ein  the  \alueof  money  as  comiiared 


THEORY  OF  PRICES 


107 


uith  other  things,  since  we  know  that  a  general  rise  of 
\ahies  is  c.  impossibility.  The  rise  and  fall  of  general 
prices  is  best  indicated  by  means  of  price  tai)les  which 
cnrrect  the  errors  which  a  limited  observation  would  be 
likely  to  incur.  The  most  convenient  and  acceptable 
j)i-i('e  table  for  the  average  business  man  i<  that  |)ub- 
lished  in  the  bulletins  of  the  Department  of  Labor.  A 
study  of  j)rice  tables  will  give  the  student  an  idea  as  to 
l!if  stage  of  the  swing  at  which  the  observed  ])rices  are. 
l.'U.  Economic  forces  to  he  observed. — Observing  the 
present  tendericy  of  prices  he  will  endeavor  to  find  the 
reason  for  the  tendency.  lie  will  find  almost  any  time 
;i  iiuml)er  of  reasons  to  account  for  a  I'ise  and  also  a 
number  of  reasons  t(>  account  for  a  fall.  This  makes  it 
lut'cssary  for  him  to  estimate  (luantitatively  ibc  ))olency 
nf  each  one  of  these  foi'ccs  and  to  balance  one  against 
the  other,  in  order  to  discover  in  wl  ich  direction  \)\g  re- 
sult of  these  forces  tends.  The  most  iinpoi'tant  oi  ihese 
permanent  forces  are  as  follows: 

1.  ProiJuctiou  of  ffohl. — At  the  ])res('nt  lime  it  will 
Ik  found  that  the  annual  production  of  ^old  is  increas- 
ing. This  in  itself  means  a  lowci-  value  for  gold  inas- 
iiiuch  as  only  a  very  small  (|uantily  of  gold  that  is  once 
lirought  into  existence  disa])pears.  Xearly  all  of  it  is 
idded  to  the  stock  already  on  hand.  It  is  estimated  that 
It  ss  than  MO  per  cent  of  the  gold  amiually  produced  is 
!is((l  in  tli<  arts.  \\\v\\  this  amount  is  not  prrmanenlly 
v\iihdrawn  I't'om  iiionctary  uses,  siiuc  it  is  so  »asy  to  re- 
ihice  old   jewelry  and  plate  to  I'oin. 

2.  I'sr  (if  siih.stiliih  s  Inr  uioin//.  An  increase  in  the 
Mii)ply  ot'  lint  <ir  credit  money  has  the  same  elVeet  on 
|)rices  as  an  ineicase  in  tlit  supply  ol'  gold.  The  ui- 
rrease  ui  C  io\  (I'liUKiii  issues  is  |)in(i\  an  iii  iiii  i  ai  \  inai- 
t(  r  aiid   it'  it   occurs   in  oiiU    one  cdiintrx    at   .'inv  gi\t'n 


1 


108 


-MOM.V   AM)  BANKING 


tunc  It  is  likciy  to  (lisi>l;tcc  tilt-  pn.portioiiate  u.  )ount  of 
ynlil  uliicli  will  l.c-  export  '1  from  the  country  as  a  re- 
sult oi'  the  ( flVcts  produ.  upon  the  forei<,ni'exchan^re 
market  hy  a  rise  ..I'  prices.  The  first  result  of  an  in- 
crease of  (;overnnient  paper  money  is  lii<ely  to  he  a  rise 
of  prices,  hut  after  the  ecinllihrium  is  estahlished  in  the 
course  of  a  feu-  years,  other  thinos  l,ein<r  equal,  the 
])rices  are  likely  to  return  to  their  former  level. 

The  increase  in  the  amount  of  credit  which  serves  the 
purpose  of  a  medium  of  exchan.ye  is  highly  important. 
This  medium  depends  upm,  the  deuree  of  perfection  to 
which  the  hanking  machinery  of  a  community  has  heen 
developed.      Ati   increase  in  the  numher  of  hanks  and 
trust  companies  and  in  the  capitali/alion  of  old  institu- 
tions indicate  increased  credit  facilities  which  are  ccjuiva- 
h'lit  to  an  increase  in  the  supply  of  the  medimn  of  ex- 
chanov.      l-",„-  sho,  t  periods  of  time  the  periodical  infla- 
tion   and   deflation   of  credit,    producing  the   alternate 
l)'H)ms  and  panics,  must  he  taken  into  account.      In  the 
year    1!>0S   there   was   a   considerahle   reduction    in    the 
••nnount  of  credit  ..ver  the  year  1!»()(  .  uhil-  the  numher 
of  hanks  and  the  amount  of  cajjitali/ation  a-iually  in- 
creased.     The    total    hank    clearings    ,,f    the    principal 
cities  of  the  I  'nited  .States  are  a  much  hetter  index  of  the 
v()lume  of  credit   doing  money   work  than  the  numher 
of  hanks  or  their  capitalization. 

ii.  roliniic  of  pnxlui'tioii.  It  is  ohvious  that  the 
greater  the  amoimt  o\'  goods  produced  the  greater  will 
he  the  numher  u\'  hiddcrs  for  money,  offering  goods  in 
exchange.  [  'ndrr  modern  eniuiitions  j)ractiraily  all  the 
goods  produced  represent  a  deman.l  for  money,"  as  they 
'nust  eh.i  ige  hands  hcfore  they  are  eonsimied.  'I'he 
jn.Min.rr  nowa(iays  very  rarelv  consumes  his  own  prod- 
uct. ■  ' 


■.^^ 


THEORY  OF  PRICES 


109 


All  increase  ot"  [jopulatioii  means  simply  an  increase 
n  the  amonnt  of  ^rjods  prodnced  and  consumed  and 
iiuans  a  greater  competition  for  the  cxistin^^  supply  cf 
money. 

I.  E.vtrava^ant  expenditures  of  the  people. — During 
the  tinancial  difHculties  following  the  panic  of  1<>()7  a 
ureat  deal  was  said  ahout  the  efJ'ect  of  the  i>rowini>-  ex- 
ii'avagance  in  personal  expenditure  on  the  ])art  of  the 
lK'o))le  of  this  country  during  the  preceding  lour  or  live 
years.  This  was  held  l)y  some  to  be  the  cause  of  the 
stringency  of  the  nioney  market. 

Of  course  the  moie  extensive  purchasing-  by  the  peo- 
l)le  represents  an  addition  to  the  bidding  for  goods  and 
tlie  offering  of  money,  so  that  we  might  ('(,nclu(le  that  a 
lise  of  prices  would  be  the  result.  On  the  other  hand 
(  xtravagant  expenditure  could  not  have  ai)peared  uidess 
incomes  had  been  considerably  increased.  Increased  in- 
comes are  due  to  a  greater  productivity.  People  pro- 
luce  more  goods  and  hence  have  a  larger  amount  to  sell 
'irfore  tbi'\  can  realize  their  income.  This  enlarged 
production  of  goods  causes  a  l)idding  for  money,  whieh 
I  Dimtei-balauces  the  eidarged  bidding  foi-  goods,  that 
Inllows  immediately  upon  it.  Thus  the  intluence  upon 
pi'lces  is  diminished. 

1.'J.5.  Saving  aiuJ  investing. — If  instead  of  si)ending 
Mieir  incomes  in  living  expenses  tjiese  people  had  em- 
i)lovcd  them  in  ativ  other  wav  excei)t  hoardiu''-  cither 

'         •  •  •  I  r> 

lepositing  them  in  banks  or  in\('sting  them  in  securities 
'lie  |)rodueing  power  woidd  sim|)ly  have  changed  its 
•nvm  and  !!!st.;!i!  (it'  causing  a  bidding  u})  of  pricci^  of 
<•on'^umpl  ion  goods  would  ha\e  iiad  :\  sitnilai'  cfVeet  in 
itinneetion    with    production    goods.      Mone\'    deposited 

I!  hanks  or  invested  in  seciuities  is  sim|»ly  turned  o\cr  to 
industrial  and  business  enti-rprises.  when  it  is  spent  for 


(');» 


110 


.M()M:Y   AM)   HANKINC; 


IIH« 


^^oods,  thus  having  the  same  effect  on  t!ie  general  level  of 
prices. 

The  effect  of  the  expenditure  of  incomes  for  con- 
sumption ooods  instead  of  for  production  goods  has  no 
immediate  effect  on  general  prices,  hut  it  has  an  in;- 
j)ortant  effect  upon  the  future  production  of  goods. 
KxjKTided  upon  consumption  goods,  the  effect  is  to  di- 
minish the  supply  on  the  market  and  encourage  indus- 
trial activity  to  rcj  'ace  them.  1  f  incomes  are  generally 
saved  and  invested  they  lead  to  a  considerahle  enlargJ- 
ment  of  the  productive  capacity  of  industries  and  even- 
tually lead  to  an  increase  in  the  quantity  of  consumahlc 
goods  to  he  marketed  when  the  factories  and  machines 
and  equipment  hegin  to  run  a  product. 

The  deductions  from  this  are  that  extravagant  per- 
sonal expenditures  tend  to  raise  prices  of  consumption 
goods  and  to  retard  future  over-])ro(luction.  .Saving 
and  investment  are  lar  more  likely  to  he  the  immediate 
cause  of  a  j)anie  and  depression  on  account  of  the  larger 
(luantity  of  goods  upon  the  market  after  the  production 
goods  have  l)een  installed  and  before  the  consuming  ca- 
pa<'  ty  of  the  country  has  caught  up  with  the  productive 
canacily. 

A  much  more  reasonable  cause  for  a  panic  than  ex- 
travagant expenditure  is  to  hv  found  in  the  unreas-na- 
i)ie  expansion  ol'  credit,  which  is  likrlv  to  he  hn.uglii 
about  by  rising  prices  and  larger  profits  which  in.lmv 
men  to  undertake  productive  enterprises  far  in  excess  of 
the  present  consuming  poutr  of  the  people.  The  in- 
creased bidding  for  money  which  such  nvrr-jiroduction 
Inings  about  gives  the  imjjulsc  to  a  cumulative  .leniand 

t'"i-  money  and  a  rai)id  rise  in  its  value  compared  with 
..It,, ..  ii  •.,  ' 

-.■■;!ivi    liiiiigij. 


THKOHV   OF   i'H!(  KS 


ni 


The  rule  therefore,  ui)()n  wliich  prechetions  as  to  the 
t'uture  course  of  prices  can  he  made  is  this: 

Do  (\iititinff  and  future  cotnlitioiis,  tahcit  as  a  rcholc, 
•.ttrraiit  Ihc  conclusion  that  the  hiddinii;  for  )iioiu\//  or 
Ihc  offering  of  goods'  xcill  t>c  stronger  than  the  offering 
iif  nunicy  and  tJie  bidding  for  goods? 


CITAPTKR  TX 

DOMESTIC  AND  lORElUN    EXCHANGE 

13(5.  liclation  hiixcccii  foreign  a/ul  domestic  ex- 
cJuni^c— in  a  precedino^  cliai)ter  mention  has  been  made 
of  the  proeess  hy  wliieh  the  o(,I,l  jjnxhieed  in  any  })art 
of  the  world  is  (hstrihuted  thronnhont  the  worhl.  In 
the  present  ehapter  it  is  proposed  to  study  a  little  more 
closely  the  details  of  the  proeess  of  the  distribution  of 
money  and  the  methods  of  makiny-  payments  between 
distant  points. 

The  subject  of  foreJnn  exchanoc  is  usually  re/:.-ar(led 
as  excecdino-ly  eomplex  and  teehnieal.  The'reason  for 
this  is  tjiat  some  of  the  fundamental  prineii)les  are  but 
little  understood.  The  prineiples  of  forei^-n  exchan^re 
ai-e  exactly  the  same  ;is  those  of  domestic  exchani>e.  the 
oidy  diirerence  beino-  that  there  is  in  foreion  exchanoe 
the  added  element  of  translation  from  one  coinage  basis 
to  atiother. 

137.  Painncuts  J>//  dikuis  uf  fmlii  Imlunct's.—'Vhc 
liandlino-  ,,f  actual  currency  in  transactions  of  any  size. 
even  Ihounh  the  currency  be  in  i)ai)er  notes  of "  larije 
det.ominations  and  the  transaction  takes  |)lace  loeally. 
is  incotivenit-r,t.  It  is  one  of  the  functions  of  bauks  to 
obviate  the  necessity  of  makini;-  payments  in  currency, 
by  means  of  a  cIk ckin,..-  system.  'tIic  whole  i(ra  of 
makino-  |)ayi.ienls  and  settlino-  accounts  without  !l  <■  u'>  ■ 
of  cash  deixiiijs  unon  the  f.';!  !  I';;!  !!!•..-!.  v  .-•=.:•»::;=■.  ..:. 


.stances  a  creditor  is  just  as  willing- 


ilii 


lo  leceive  m  pay  men  1 


UOMKSTK     AM)   FOKKKiN    I.Xc  i  i.\N(;i:        ]i;) 


llic  ri^lit  to  (kiiiniid  itioiuy  as  lii'  is  to  rttfu  c  the  cash 
ilM  If.  Ill  cases  of  lar^e  Iraiisaclioiis  il  wouhl  he  coii- 
sulei-ed  a  tcreal  hardship  on  thi'  part  of  the  rccij)iciit  of 
the  payment  to  he  re(|iiire(l  to  accept  the  eun-ency. 

i;JM.  Funclidii  of  I  lie  Ixnil,'  iu  ind]yiii<j;  jxniiiuitt.s. — 
.\  hank  Is  an  institution  which  permits  persons  to  create 
(  recHts  eitlier  })y  the  deposit  of  cash  or  hv  horrowino'  at 
M)e  market  rate  of  interest.  l''urthermore  it  permits 
iiese  creditors  to  (h'aw  onk'rs  ii])on  it  for  anv  amount 
lip  to  tlie  hmit  of  their  erecht.  These  oriKrs  or  checks 
nive  th.c  holder  the  ri«4lit  to  demand  the  cash  or  to  create 
I  ic<ht  for  himself  hy  a  deposit  of  the  checks.  These 
credits  on  the  hooks  of  the  hanks  in  favor  of  their  pa- 
lions  furnish  a  mi-uis  of  j)ayment  Mliich  has  almost 
sii])crsede(l  tlie  use  of  cash  in  transactions  of  anv  size. 
If  there  were  only  one  hank  in  a  town  all  the  checks 
drawTi  against  it  would  return  to  it.  either  for  payment 
or  (lejKisit.  If  there  are  several  hanks  in  the  city  some 
M)rt  of  clearing  system  is  retjuired  for  settlinir  the  dei)it 
and  credit  halances  among-  the  different  institutions. 

l.'J9.  Pa//iiiciit.s  at  (I  disiducc. — When  j)aynients  arc 
to  he  made  hetween  distant  localities  the  matter  of  dis- 
i'"ce  iiicreases  the  comi)lexity  iA'  making  the  si'ttlc- 
iiiv.its,  l)ut  the  prinei|)les  remain  the  same.  If  a  husi- 
ness  man  in  Chicago  wishes  to  pay  a  hill  in  Cincinnati 
he  will  prohahly  draw  a  check  on  his  local  hank  exactly 
IS  though  his  creditoi'  did  husiness  in  the  same  citv. 
The  Cincinnati  man  will  (lej)osit  the  check  in  his  local 
hank  and  i)ut  ui)on  it  the  hurden  of  making  the  col- 
''(lion.  \\'lu  n  till'  hanking  system  of  the  country  was 
not  so  well  organi/ed  as  at  present  the  charge  for  making 
eollcctions  of  local  checks  was  so  heavy  that  the  creditors 
iVcfiucntly  refused  to  take  local  checks.  Tiider  tlii'se 
circumstances  the  dchtor  was  ohliged  to  apj)lv  to  his 

Vll     y 


#f3 


K^ 

» llKjlj< 

Bpila 

'  ^^B^^^9 

^^^M^ 

114) 


.M(A1',\     AM)   1{  \\KIN(; 


h;inl<  I'or  a  dial't  wliifli  would  lie  acccptulthj  in  the  city 
\\1r  re  liic  amount  was  |)ayal)l(.'. 

The  ('act  that  New  V'oiU  is  the  coninK-rcial  and  finan- 
cial ccntci-  i)f'  the  I'nitcd  States  and  that  hnsincss  men  in 
evei'v  city  and  town  are  likely  to  liave  tinancial  relations 
uith  that  city,  citlier  purchasing-  ^-oods  from  it  or  sellin<r 
^•oods  to  it.  has  made  it  a(hisahle  i'or  hanks  throughout 
the  country  to  maintain  deposits  in  hanks  of  that  city. 
'J'hus  it  happens  that  there  are  always  ])ayments  to  he 
made  in  New  \'ork  hy  merchants  huyin^  there  and  pay- 
.uents  to  he  made  IVom  that  city  hy  merchants  selling- 
there. 

IK).  Exchange  ())i  Xnc  Yorlc. — "Without  ''  ^  use  of 
exchani^e  it  wouhl  he  necessary  t(^  pay  for  every  shiji- 
nient  of  froods  l)y  forwarding  cash  and  to  receive  pay- 
ment for  every  c()rKsi<4nment  hy  transporting  cash  in  the 
()j)l)osite  direction.  With  the  use  of  credit  the  ship})er 
in  the  inland  town  receives  ])aynient  for  his  eonsio-nment 
hv  either  drawing-  a  draft  uj)on  the  consi^-nee  or  uwait- 
ini'-  the  receipt  of  a  draft  upon  a  New  ^'ork  hank. 
Kither  of  these  instruments  lie  (le])osits  in  his  local 
hank  which  forwards  it  to  New  Voi'k  and  receives  a 
credit  there  u])on  the  hooks  of  the  hank  against  which 
it  ^vas  drawn.  The  bank  has  then  the  ri^ht  to  receive 
a  certain  sum  of  money  in  New  Tork  and  can  realize 
upon  this  ri^ht  either  hy  recjuesting  the  shipment  of  cash 
or  hy  drawing  a  draft  against  it. 

Merchants  who  have  made  purchases  from  New  York 
must  pro\  ide  a  means  of  payment  in  New  Vork  when 
the  l)ills  are  Ciwc.  The  local  hanks  having  deposits  in 
New  Vork  are  (julte  willing  to  sell  orders  upon  the  New 
York  hank.  Thus  hv  means  of  buying  and  selling  the 
right  tf)  sums  of  money  in  New   Vork  the  payments 


Do.Mi^ric  ANP  lOKi'.KJN  !:x(  n.\\(,!;       iir, 


wliicli  arc  iicccssitatid  l)\-  tiif  iiion  I'lmnt  n|'  ooods  in  ami 
Dill  arr  made. 

I  U.  Ilo'a'  llif  hdiiLs  htdidlc  A'(  Ti.'  }''//•/.■  i\r(  lifin^^r. — 
.\(\v  ^'()^k  cxcliaiiLiC  or  ordir.s  ii|)()ii  deposits  in  New 
^  iii-k  hanks  arc  accri)tal)lr  ex  cryw  lici't  :  in  the  first  'acv, 
lircTuise  tlierc  ai"e  so  nsany  persons  \\  ishiii<4'  to  make  pay- 
iiK  iits  in  that  city,  and  in  the  second  ])Iace  hecausc  every 
h;inkin<if  institntion  in  the  conntry  deals  either  directly 
r  indirectlv  witli  some  New  Vork  hank. 


() 


How  tlic  local  hank^  oil  fliiir  powir  to  ■-fll  drafts  on  \cw 
^  mk  can  hc^t  l)f  shown  l)y  a  (■(incntf  illu^t  raf  Ion.  We  will 
Mi[i|)n>L'  that  a  hank  in  Auroi'a.  Illinois,  has  on  ({(.'posit  ^1(),()()() 
\ufh  till'  l-'irst  National  of  Chica^i).  Let  ns  su|)[)()se  that  an 
Aurora  niannfactun  r  has  sold  stoves  to  an  (a--ti'rn  dealer  and 
ia^  reiH'Ivi'd  in  payment  a  check  for  ."^l,!)!!!)  on  the  Corn  K\- 
<  hange  hank  of  New  Vork.  He  will  deposit  this  clieck  in  his 
.Vuroni  hank,  uhlch  will  send  it  to  its  Chicairo  c'orre-.pondent, 
iiid  therehy  increase  its  credit  halance  to  S]  l.OOO.  Thv  ('hica<^-() 
i'liik  will  send  tlu-  check  to  its  correspoiid(  nt  in  Ne«  Vork,  and 
n  increase  its  ciedit  halance  in  New  Wnk  hv  ^1.000.  Bv  an 
inanu'enient  with  the  l-'ir.' t  National  Hank  of  Chic/i^'o  the 
Auroi-a  l);ink  i>  ahK'  to  sell  drafts  on  the  Coi'n  I'Achanere  of 
\i\\  Vork.  u-in^-  for  the  purpose  hiank  draft^  furnished  hv  the 
r!i--t  National.  It  is  (|uite  possihie  that  on  the  same  dav  a 
;iierchant  in  .\nrora,  who  has  hou^ht  oi)i)(Js  from  New  Vork, 
'ill  call  upon  the  .\urora  hank   for  a  draft  on  \cw  Vork.      Ho 

ly  not  want  a  draft  for  exai'tly  ."^l.OOO.  hnt  that  does  not  mat- 
'  r.  The  Aurora  hank  is  ahle  to  sell  hini  a  draft  to  anv  amount 
up  to  .*i<l  1.000.  for  its  credit  halance  in  the  f"hicajj,'o  hank  i^lxis 
it  a  rlf^'ht  to  "draw""  upon  Ni  w  \'ork  for  that  anioiuit.  Thus, 
•  n  account  of  New  York">  trade  relations  with  all  })arts  of  the 
■■"iiilrv.  hank>  e\  er_\  \\  here  are  u-ually  ahle  to  sell  drafts  on  that: 
I  ;tv  without  helna'  comi)elled  to  ^hip  currencv. 

New  Vork  exchan^'e   is  u--ed  not   only   for  payments  hetween 


lU) 


MOM'N-    W!)   B.WKING 


New  ^  Mik  :r.\i\  ()tli(  r  p.irt-  ot'  tlir  couiilrv  hut  aNo  for  pavimiiK 
lictwirii  point-  in  the  ruilid  Stales  outsi(!c  of  N.u  NOrk.  A 
iiiJUi  livinj^-  in  Hiill'alo  who  owes  .<1. ()()()  to  a  man  in  New  Or- 
li'jins  can  hot  pav  t  hr  dc  ht  hv  remittin>>-  ;i  (h'aft  on  New  York 
Citv.  'I'his  mrthoil  is  t!ic  one  usualiv  cniploved,  for  Buffalo 
hunks  inaintiin  no  liakuu'cs  in  New  Orleans,  and  so  cannot  sell 
(liMfts  on  that  citv.  'J'hey  can,  however,  si'll  a  (h'aft  on  New 
\'ork,  anil  that  will  Usuallv  he  accepted  hy  New  Orleans  hanks 
at  par.  Wluii  the  n.aler  takes  into  account  that  New  \'oik 
diecks  and  drafts  are  e\ery  day  l)eln<f  used  in  this  way  for  the 
cj.ncellation  ot'  (Mils  in  all  parts  of  the  United  States,  Ik  will 
iiiuK  Island  why  N,'w  \'ork  exchange  is  deservedly  called  the 
'"husiness  nirufs  inonev."'  ' 


14-2.  Stilli  incut  (if  (iccoinits  ])cfzccni  hauh-s.-AVhWc 
ill  tlie  lono-  iMHi  \]iv  iiK.vtineiit  of  ooods  from  New  York 
and  to  \(  \\  Vnvk  iiiiist  ])i-;icti('ally  halancr,  yet  it  would 
!)(.'  a  rare  cnim-idctift'  if  l!ic  foiimiodities  sent  from  any 
given  locality  to  X-w  \()rk  txactly  balance  the  goods 
reeei\c(l  froni  that  cit}'.  Any  ))avtieiila-,-  hank,  there- 
fore, lias  occasion  tr<  purchase  iiio'-c  Xc\v  \'oi'k  exchange 
than  it  needs  to  sell,  or  it  has  a  demand  for  more  than 
it  has  occasion  to  buy  or  receive  on  depcwit  from  its  cus- 
tomers. CnlesK  the  country  haid-c  wishes  to  shift  its 
deposit  account  i'rom  a  \e\v  York  ])ank  to  some  c>lier 
1/ank  it  will  be  ncctssuiy  to  make  a  shipment  of 
currency. 

In  case  a  country  ])ank  has  a  dej)osit  with  its  Xew 
York  corresjiondcnt  mIucIi  it  considers  lar<>'e  enouoJ!  it 
will  accept  dejxjsits  of  checks  on  New  ^'()T•k  only  uitli 
the  intention  of  makino-  slii]>merds  oi'  cash  to  reimliurse 
itself  for  the  sums  jiaid  out.  The  shijjmerit  of  currencv 
involves  expense  and  it  i^  (pn'te  likely  that  it  Mill  not 
acce]n   suj)LJ!un)us   TNtw    "I'ork  exclian^e  uiiiess   it   re- 


1  Ji 


Ml 


and  ('uiTi'iUA',"  pp.  7;»-bO. 


DO.MKS'riC  AM)  FOUr.KiN    KXCIIANdi! 


117 


c.ivcs  a  i'vv  which  will  cover  the  cost  of  coUcctiiio-  the 
same  in  cash.  'I  his  cost  ,lej)e[uls  upon  three  items:  first 
il;<  (  xpress  charge,  second  insurance,  and  third  the  loss 
if  intefcst.  The  chai-^^'c  for  trans])()i'tation  is  usually 
(Minliiii((l  with  the  chai\u'e  I'or  insurance  hy  the  expi'css 
(iiiiipany.  'I'he  moment  the  \c\v  'S'oi'k  hank  delivei-s 
ll:i'  cash  to  the  express  company  for  shi|)ment  to  the 
(Mimtry  hank  upon  its  order  it  ceases  to  pay  interest 
iilMiii  that  sum.  The  counti-y  ])ank  therel'ore  loses  the 
interest  upon  the  same  until  it  receives  it  and  uses  it  as 
a  hasis  for  interest  })aying  loans. 

II.'}.  Cosl  of  ciirrrnc//  slii/Jnwiit.s. — The  cost  of  cur- 
i'  iiry  shipments  l)etween  New  \'ork  and  Chicago  is  in 
the  neighborhood  of  .50  cents  |)er  thousand  dollars;  be- 
i\\een  St.  Louis  and  Xew  York  it  is  (>()  cents;  between 
New-  Orleans  and  New  York  it  is  75  cents,  and  between 
San  l-'i-ancisco  and  Xew  York  it  is  .$1..50. 

\H.  St'ftUmcnts  through  the  stih-trcasurics. — The 
r  »st  of  shipping  currency  from  one  city  to  the  other  is 
tVe(]uently  saved  to  the  banks  by  the  Treasury  Depart- 
I'lc  ul  of  the  Government.  For  a  good  many  years  pay- 
ments to  be  made  between  the  Treasury  at  \Vashington 
and  the  sub-treasuries  in  the  various  large  cities  were 
all  conducted  by  casb  shipments.  It  happened  \  ei-y  fre- 
quently that  at  the  same  time  that  the  treasury  was  for- 
warding consideral)le  sums  of  cash  between  two  cities, 
the  banks  would  be  shipping  currency  in  the  ()p])()site 
direction.  An  ingenious  cashier  in  Xew  Orleans  early 
in  the  seventies  suggested  to  the  Secretary  of  the  Treas- 
ury, McCullough,  that  a  saving  both  to  the  Government 
:iMil  the  banks  might  be  effected  if  the  banks  when  they 

WKjlcil      to     tr.'U!S!l!!t     !>>.f!!l!'\'      to     ;•      clfv      !!!      \vl>.!''!!      !!      mib- 

treasury  was  located  would  asct-rtain  whether  the  Gov- 
ernment at  tlic  same  time  did  not  w  ish  to  send  monev  in 


Mi 


-'Wf- 


118 


-MONKV   AM)  TANKINd 


the  opposite  directioi!.  IT  this  pro\t(l  to  he  the  case  it 
wo'ild  he  j)rofitahl('  to  the  hanks  and  to  thi'  (ioverninent 
to  allow  the  hanks  to  deposit  tlif  inohty  in  the  Treasurv 
and  reeei\e  an  onkr  iii)on  the  'J'reasniy  in  the  other  eitw 
The  Treasury  otliee  in  the  first  city  would  receive  the 
currency  it  iv(|uire(l  iVoni  the  de])()sitin^'  hank  and  th" 
hank  in  the  otlici'  city  would  recei\i'  tlu'  eurrencv  tVoni 
the  'I'l-casury  instead  of  tVoin  its  cori'cspondcnt  and  ^ll 
cost  of  transjjortinn'  the  money  would  he  eliuiinated. 

14").  Utile  t)f  A'ci.'  l'n/7.'  cxv)iiin^c, — Suppose  tliere 
was  a  <4rr:it  deinan^'  for  Xew  ^'ork  exchange  in  any 
city  on  account  of  the  hea\y  hills  of  iiierchan(hse  faliiiiu' 
(hie  at  some  pai'tieidar  season  of  the  yiar.  'I'hc  hanks 
will  diseo\er  that  the  demand  for  Xew  ^'ol•k  exehanm' 
far  cM'ceds  the  supply  of  checks  and  draffs  deposited 
hy  customers.  'I'heir  di  posits  with  their  Xew  N'ork  cor- 
respondents are  reduced  and  in  order  to  continue  sell- 
in,t4'  Xew  ^'ork  exchanu'e  thty  must  ship  currency  to 
that  city.  In  that  ease  Ihey  will  he  justilied  in  cliar^- 
in^'  at  least  .')()  e(  nts  pi-emium  for  every  $1, ()()() 
ol  Xew  N  oik  exehanue  sold  in  ordei'  to  i-eimhni'sc 
themseKc'-  for  the  actual  cost.  Competitiou  hetwcen 
the  local  hanks  will  not  permit  a  much  liinher  chai'^e 
than  this. 

On  the  otiiei-  hand  if  tlu  rtciipis  <d'  Xew  ^'ork  ex- 
chaniic  cxeicd  the  deii  and  for  it,  on  account  of  hca\\' 
shipments  of  ^i.-iin  or  produce  to  the  chief  exportiiiu 
city  ol'  the  country,  the  hanks  will  find  their  deposits  in 
Xe\s  ^'oi'k  la rijtr  than  they  cai-e  to  mainl.iin.  'I'lic\ 
will  he  I'orced  to  oi(l(  r  shipnit  nts  of  currrnc\  to  them. 
To  reiudMu-sc  lhems(  i\(s  foi'  'he  expense  !|i(  \-  will  suh- 
lr;ict  fiom  the  f.icc  \;ilue  of  the  exchange  hou^ht  tif 
i  ;-;•;-;■.;;  i     ;:;;     ;;;  j ;;  ;si ; .     Tiii      (lisi     tiT     (iOiiij^     liic     iitoiiicSS. 

'I'lius  it   IS  po>>ih|e  i'nr  (Avli.uiac  on  X( w    ^'ol•k  in  San 


DOMESTIC  AM)   FORKIGN   KXt'IIANGK 


119 


I'ratu'isco  to  he  sold  at  a  preniiuni  of  $1.50  or  to  be 
(.■H'eied  at  a  (liscoiint  of  the  same  amount. 

14(;.  S'ifj;nijic(im'c  of  ndcs  of  domestic  twchdugc. — 
'i'hc  premium  or  diseount  on  domestic  exehan^e  is  ])uh- 
lished  ill  the  pririeii)al  dailies  and  is  nseful  to  the  husi- 
iii'ss  nuui  as  indicating-  the  volnme  and  dii-ection  of  trade 
;it  any  ])articular  time.  An  unusually  hi^h  premium  on 
New  York  exchan<^e  or  an  unusually  j)i'()lon^e(l  ])re- 
inium  will  indicate  that  the  purchases  of  local  merchants 
lias  hcxti  unusually  heavy  in  that  year  if  tlure  are  no 
unusual  transactions  to  affect  the;  prit-e  of  exchange. 

Why  does  it  not  happen  that  under  certain  circum- 
stances a  communitv  mav  huv  moiv  aoods  than  it  sells 
during'  any  ])articular  period  and  thus  he  forced  to  j)art 
with  all  of  its  currency  in  settling  the  halance:'  Since 
*  ach  trader  is  simply  looking  out  i'or  his  own  private 
jM-ofit  and  does  not  concern  iiimself  with  tl;e  (piestion 
of  the  amount  of  currency  there  seems  to  he  no  reason 
uliy  a  comnumity  might  ji(»t  he  drained  of  its  currency. 
This  hrings  uj)  the  cjuestion  of  the  halance  of  trade,  the 
jMineijjles  of  which  arc  the  same  whether  thi'  exchange 
of  goods  is  l)etween  two  sej)arate  nations  or  hetween  two 
localities  within  the  same  nation. 

Su])pose  foi"  any  reason  that  there  should  he  an  un- 
usuallx  hea\  y  puichasing  of  goods  hy  the  merchants  of 
;i  western  State  in  any  ])ai'ticidar  year.  The  merchants 
would  huy  from  the  hanks  N'lw  N'ork  exchange  with 
which  to  j)ay  their  hills.  The  lianks.  ai'lei'  lia'.ing  ex- 
liausted  their  credits  in  \ew  ^'oI■k  would  hi  oI)ligcd  to 
hip  currency  in  oi'der  to  co\er  the  drafts  on  New 
^  lu  k  sold  [,,  tin    merchants. 


■nil 


:'%:i 


I    rii'i'i'    I*,     till      t*    'iii\      iriitii-«ii'    (li!i)     •!     «w  till)  1 1 1 1 II  it  I'     It  ill     ill      >..  t  1*1 1  \i  It  •!  I 


A   \\^  nuMu  V  or  'm--Ii  a^  m  rcNiiH  of  Its  |Mir<'lwi''(N  nl'  intods  f'roiM 


JIIW 


1J>() 


MUM:V   AM)  HANKING 


otiicr  rommnnitli-.  No  matin-  li,,u  fnrlv  Cliit'Ho-,,  aiul  llio 
coniilrv  tnl:iit;u-\  to  it  iiia;,  puirliaM'  o(wi,is  from  lli<-'  K.i^l. 
thoM  J)^ll•(•|l,■|s(^  can  iir\t-r  mak<'  aiiv  xTJous  drain  upon  the  ca^! 
supply  of  Chicago.  N,,  matter  hou  rxtravaoant  the  jicople  of 
the  Wot  may  he,  tlirii'  puivhiisis  of  ca4rn,  ^ood-,  can  nc\(>r 
In  ^ivatlv  in  cxccvs  of  tlicir  salo  to  eastern  customers.  Sliould 
I  111'  people  of  Chicago  for  (  \l  raordinarv  reaM)ns  at  anv  time  in 
•  TcaM'  their  ))ureha-.es  from  N.  w  York  and  other  eastern  cities, 
the  Iir4  etfVct  in  Chica^io  uonid  he  an  increase  in  tl:e  demand  for 
Neu    York   exchange  and   in   l»aiik   sliiprneiits  of  currency   fro 


m 


Chiea-o  to  Neu  York.  Tlie  loss  of  currency  in  Cliican-o,  Miice 
it  N^ouid  rrduc,  the  len.lin-  pouir  of  Chica-o  hanks.  «o„ld  tend 
to  eausc  a   ri^e  in   the   rate  of  inter,  st  and  a  ri~i    in  the  \ahie  ,d' 

money.      'I'he   pi-uvs  of  certain   co ditie.   uculd   he-in  to   de- 

•■''"•■-  ""'  "'■■■'I'  i'<Mnmo.hli.-.  l,u|  „f  those  wlieh  are  suh.ieels  of 
sp.rulition.  such  as  s|,,cks.  uh,,,l.  •■orii  and  pm'k.  .M,,st  of  the 
-peeidatnrs  in  tliesc  .articles  are  horrouers.  and  the  int.'resf  tliev 
pa\    Is  an    impurtant    item    in    the  expenses   of   their   l)Usiness.   so 

'''•■''  "I""  'I'''  llll'>esi  rate  ris.  s  the\  are  uhli;;ed  lo  ..mtra.'t 
""''■  ••[•"•■'''■"I--  Chi.'a-o  uonld  ihws  lieconie  a  o(„.d  place  to 
I'  11(1  ui  .■■lid  als,,  I  nnod  place  in  vJiich  lo  luiy  stocks  .ami  i)onds, 
uheat.  ,11.1  nth,  r  spcculativ,'  coimiiodit  i,  >.  In  ,,th,'r  vv(,rds.  li,,. 
valu,  of  m,,ii,  \  uould  lis,,  in  Chi.,,-.,,  an. I  p...p|,.  m  ..th.r  p  .rts 
"*'  ""  <'"iiiitry  «,m!d  iiier.asi'  th,  ir  |.urcliasc.s  in  Chic.ao.,  |,,,ar- 
k.ts.  r.milliT'n'  Neu  ^■.,|■k  .\.'han,-v  in  p.iMii.nl.  Th.'  r.ader 
must  11,1  suppose  th.ii  Ih.is,.  chane.s  in  pn.v  ,m-  in  the  rate  ,d' 
intuLst  1  ,.l  h,.  so  -r,  ;d  ..s  lo.diract  ;;cn.  rai  attent  i.ni.  N.  \.r- 
Ihek'ss  it  cum.. I  h.  .i..uht,.|  Ih.d  such  chaiio-.  s  d,,  i,,k,  |,|ace.  and 
that  as  a  r.sult  the  sales  ,,f  (  hica-o  to  other  parts  ,,f  I  h.  nnui 
''■.^  •"'  ~"  ••"i.liisl,.!  that  in  III,.  loiiM  rt.n  t|i,_\  furnish  .i  supply  of 
New  York  fxchaii^i'  e(|U.i|  to  tl  .   .1,  muid. 

'I'hus  ;i  |,;,pp,ns  throuuhoul  fho  country  lliat  in  the  .-..urs. 
ot  .a  \,  ar  the  d.  hts  nf  Iv.  ry  coniiuuuify  .tr.'  always  practicajh 
lialaiiced  l)_v  its  cndits  .ni  a. count  of  sal.s.  .,.  tint  l.irM..  ship 
III.  ?its  nf  -Tri'iicv  are  iieyer  neressnry.  In.i, .  .k  it'  .,,,.•  M,,,..,f. ■!.•.. 
•uid  li  inkiii;^  svst..nis  w.  r.    p.  i  f.  .1.  m,  shipm,  nt  .,t  cm.t,  iicy  from 


DO.MKSTIC  AND  FOKI'.KIX   KXCHANGi: 


121 


mil-  part  (if  the  louiitiy  to  anotlur  would  Lver  occur  a>  a  ucccs- 
•arv  result  of  trade  transactions.  .Money  or  currency  would 
(iiily  he  .shipped  to  a  connnunity  as  a  result  of  an  increasino-  netd 
\'iU-  it  as  a  medium  of  exchange  or  as  a  hasis  for  the  expansion 
1  !  hank  credits.  In  Canada,  for  examj)le.  on  account  of  the 
elasticity  ol'  its  hank  note  circulation,  >easonal  variations  in  the 
(It  iiiand  for  currency  are  easily  proxided  for  by  the  local  hanks 


I      ^ 


.1  tl 


U'U'  Uranches. 


.  1 


I'T.  2'Iic  clctiri;'^-  liousc  prinriph'. — Doiin.'stic  ex- 
change as  we  luive  seen,  is  simply  a  hanking  deviee  to 
avoid  the  iinneeessarv  sliipnient  of  nionev  1)V  settlinijr  hal- 
.ihces  only.  The  |)rinei;)le  is  e.xaetly  the  same  as  that 
DM  whieh  elearing  houses  are  based.  The  hanks  in  any 
diK'  eity  find  at  the  end  of  the  ihiy  that  they  have  re- 
(•(ixed  from  their  depositors  a  great  numhir  of  eheeks 
rawn  on  neighhor'ng  l)anks.  Hefore  the  days  of  the 
'raring  house  eaeh  hank  sent  a  messenger  to  all  the 
.iiers  with  the  items  against  tliem  and  reeeived  the  easli 
ill  |)ayment.  At  the  same  time  that  each  of  the  banks 
\\(i'e  seiKhng  out  messengers  to  make  eolLetions  tlu'V 
wvvv  |)aying  eash  ovei'  tlu'  eountcr  to  the  messengers 
ol  other  i)anks  in  settii'ment  of  the  checks  aiiainst  them. 
l>y  ha\ing  a  common  place  of  mtcting  tlu'  mi'ssengers 
"Mild  deliver  the  items  to  the  debtor  banks  and  could 
irii\c  the  checks  lepresenting  tlii'  credits  i,\\\v  them  all 
il  OIK'  time  and  could  easily  figure  up  the  diircrcnce  be- 
lu(  (  II  the  (kbits  and  the  credits.  .Settlement  could  then 
'-  made  by  payments  representing  the  dill'iicnces  which 
"ere  likely  to  be  less  than  10  per  I'cnl  of  the  total  trans- 
:!■  lion,  tliiis  '^.-ning  the  IsMMdling  of  '.»()  per  Cent  ■)('  the 
cash  represented   by  the  checks  handled. 

The  dealing  house  |»iiiieiple  li.is  no!  yel  been  appli«'d 


Mi 


i 


IS  lullcs.  ,\tt  nf   in  th(    setlliiju-  of  aci'ount' 


•tw 


ecu 


,Im| 


iliMiii.  "  .Mi(ii(\    Mihi  (  iirriiuN, 


s  i  sv. 


lati 


MUNKV    AM)   HANKINC; 


banks  in  different  localities.  The  forwarding  of  the 
cheeks  to  a  central  point,  together  with  other  difficulties 
which  will  he  discussed  later,  has  up  to  this  time  made 
the  establishment  of  a  clearing  institution  for  out  of 
town  collections  an  impossibility.  The  same  result, 
however,  is  accomplished  by  the  custom  of  country 
banks  keeping  balances  in  the  city  banks  and  drawing 
against  such  accounts  instead  of  shipping  currency. 

148.  Si'tflin<^-  hdUiucts  h/j  usf  of  (77yZ/7. Methods 
have  been  found  for  eliminating  tiie  shipment  of  cur- 
rency, even  in  order  to  pay  balances.  IJanks  whicii  be- 
come debtors  to  others  through  the  settlement  ol' 
accounts  may  I)orrow  the  balance  due  from  tjie  creditor 
bank  and  i)ay  interest  thereon.  'I^iis  of  course  is  :  )t  a 
final  settlement  of  (he  balance,  but  simj)ly  postpones  the 
.settlement,  yet  if  in  the  near  future  the  balance  happens 
to  iim  in  the  op|)osite  direction  the  loan  may  be  li(|ui- 
dated  by  a  credit  balance  instead  of  by  the  p.iyment  of 
cash. 

1  !■!).  (iohJ  the  infrnidfidna!  medium.  In  the  case  of 
domestic  exchange  ultimate  payments  may  be  made  iti 
any  form  of  cm  rency  but  in  tiie  settlement  of  balances 
between  dilferent  nations  gold  is  the  only  acceptable 
mediiun.  .Since  m,)|,j  is  tlu-  ultimate  basis  of  credit  in 
all  civilized  eiiiintries,  and  since  a  \olumi'  of  cin'renev 
from  SIX  to  t(n  times  its  amount  is  erecttd  u|)on  it.  the 
niovmients  of  noj,!  fnmi  mw  pl;iee  to  another  are  of 
\astly  more  impoitance  than  mo.rnienis  of  any  other 
form  of  cash.  Ivxports  and  imports  o|  o,)|,l  in  and  out 
of  a  country  are  likely  to  disturb  the  money  situation  ;in(i 
to  P(C(ssitate  lVe(|uent  readjustments  of  eredi!  eondi- 
tions  at  new  rates  of  interest.  The  movements  of  gold 
i<'it  i^^ii  ixeiiaiiL'e  opv  laiioiis.  and    il   is 


«i  I  \_      lilt       t  t    -^  1 1  I  t     t  f  r 


DOMKS'riC   AM)  VOHKKIN    KXCHANdE         123 


this   fact   which   causes   hiisiness  men   to  scrutinize   so 
carefully  daily  ijuotations  for  foreign  exchange. 

1.50.  Finiction  of  ihc  dealer  in  foreign  exehange. — 
'I'he  service  to  the  business  coniinunity  of  the  interna- 
tional hanker  who  deals  in  foreign  exchange  is  not  only 
that  he  does  away  with  over  90  per  cent  of  the  shipments 
of  gold  which  would  otherwise  he  necessary,  and  thus 
causes  a  great  saving  of  expense  and  risk  in  settling 
commercial  transactions,  hut  of  far  greater  imi)ortance 
is  the  service  that  h(  renders  in  steadying  the  credit  con- 
ditions the  world  over.  His  function  is  more  than  to 
eliminate  the  shipment-  of  money  l)ack  and  forth  to 
make  payments  -he  still  further  decreases  such  shi})- 
mcnts  hy  borrowing  and  lending  in  foreign  markets, 
so  that  the  final  and  a])solutely  necessary  shipments  of 
gold  are  retluced  to  a  very  low  minimum  as  com})ared 
to  the  total  amouJit  of  Inisiness  transacted. 

l.")l.  KA'dinple  of  foreifxn  e.vehan^e. — Let  us  take  a 
tvj)ical  case  in  foi'cign  commerce  and  show  how  the  in- 
ternational banker  facilitates  the  transaction.  Armour 
vV  Company  receive  an  order  frun;  a  liritish  dealer  in 
Cleats  for  a  shipment  of  beef.  After  the  beef  has  been 
loaded  on  the  cars  Armour  \  Company  draw  a  draft  on 
!he  Knglish  consignee  which  in  effect  reciuests  him  to 
pay  to  the  Chicago  National  Hank  or  anybody  else 
disiunaled  bv  them,  the  sum  (d"  1: 1.000  sterling. 
Armour  \  Comi)any  might  have  waited  until  the 
l''.nglish  customi-r  had  received  the  meat  and  remitted 
to  them  a  ciicck  which  .\rmo>ir  \  Company  could  have 
collected  Ihrough  theii'  bank.  If  this  u  (  rt  Ihc  I'Ustom 
Armour  \;  Com|)any  would  be  iiciuiicd  to  tie  uj)  an 
rnormous  amount  of  capital  in  this  export  business.  It 
IS  the  aliiiosi  universal  itruclice  of  British  business  men. 


^^^^^gmm 


■:sf 


vn 


MONEY  AM)  IJAMvING 


lunvevcr,  to  draw  upon  tiicir  customers  for  the  amount 
of  o(,n,ls  sold  as  soon  as  tlicy  are  shipped  and  the 
American  exporters  find  this  very  advantageous  because 
they  can  reahze  the  proceeds  of  a  sale  of  goods  very 
i|uickly  and  it  reheves  them  from  the  necessity  of  b(/r- 
rowing  so  mucli  working  capital. 

The  Chicago  National  Hank  is  wiUing  to  purcliase 
or  give  crefht  to  Armour  .^  Comj)any  for  the  (h-aft  im- 
me(h"ately.  aUhough  it  cannot  reimh'urse  itself  for  sev- 
eral weeks  uidess  it  sells  the  draft  outright  to  another 
hank,  in  which  case  it  simj)ly  shifts  the  hurden  to  the 
other  !)ank.  It  is  the  business  of  a  hank  to  provide  com- 
merce with  working  capital  for  a  consideration;  in  tiiis 
ease  the  consideration  comes  to  them  in  the  form  of  a 
discount  which  they  deduct  from  the  face  of  the  (h-aft 
in  jjurchasing  from  Armour.^  Company. 

l.VJ.   nini  haiihir.s  arc  tf//////-  /o  purchase  foreign 
(Jrafts.~Thv  hankers  arc  willing  to  purchase  the  draft, 
even  though  they  have  never  lu^ard  of  the  Knglish  firm 
on  whom  it  is  drawn,   for  the  following  reasons:     (1) 
The  reputation  of  Armour  \  Compai.v  assures  them 
tiiat  the  (Ira It  would  not  he  drawn   utd"ess  a  shipment 
of  merchandise  had  been  made.      (•_>)    Armour  .V  c"om- 
pany  as  drawers  of  the  dralt  under  the  universal  law 
"I"  negotiable  instruments,  endorse  the  payment  of  the 
s:ime   and    may    be   held    for    payment    if"  the    Knglish 
drawe(    fails  to  accept  it.      (.'})    "in  most  cases  there  is 
attached  to  the  draft  a  negotiable  bill  „f  lading  which 
vests  the  right   to  receive  the  goods  in  the  jxissessor  of 
""'  '"II  <•'■  lading.     'I'hr   Knglish   bank   to  whom   thev 
l)avc   assigned    the    draft    will    n,,t    deliver    th-    bill    of 
huhng    until    the   consignee    has  accepted    or    paid    the 


til  ai  t. 


(  f  ) 


lo    still     lurfher    guarantee    the     !)ank.s 
•.igani->t  loss  there  is  attached  to  the  draft  beside  the  bill 


'«^ 


DOMESTIC  AM)   FORKKJN   KXCHANC.E         I5i5 

(»r  ladiiio-  an  insurance  policy  which  entitles  the  banker 
o  receive  reimbursement  if  the  consionment  should  be 


damaged  or  lost  in  transit.     There 


may  also  be  attached 


to  the  draft  certificates  of  Government  inspection  certi- 
lyino-  the  (juality  of  the  meat  and  also  an  inxoice  of  the 
shipment, 

hy,i.  Progress  of  draft.— These  safeguards  arc  so 
-ifective  in  ouaranteeino-  ])aynicnt  of  tiie  draft  that  it 
is  extremely  rare  that  even  a  (hspute  occurs  in  trans- 
actions of  this  kind.  The  Chicao-o  National  Hank,  if 
it  has  no  corres})ondent  in  Enoland.  may  sell  the  draft 
in  Xew  Yiu-k.  The  Xcw  Ynvk  bank  w  ill  send  the  (h-aft 
to  England  for  collection  and  credit  the  same  to  its  ac- 
count. New  Vork  banks  are  always  willing  to  j)urchasc 
these  foreign  drafts  and  to  create  credits  abroad  in 
Older  to  be  in  a  jjosition  to  sell  foreign  exchange  to 
importers  and  oth.ers  who  are  re(im'red  to  make  pay- 
ments abroad.  The  foreign  trade  of  this  country  "is 
so  huge  that  there  is  always  a  demand  as  well  as  a  suj)- 
ply  (d"  foreign  exchange.  The  international  l)atiker  who 
(le;ds  in  it  is  exactly  like  a  merchant  who  buys  and  sells 
any  commodity. 

1.54.  Quotations  for  foreign  ear h a nge. —The  (juota- 
lions  for  sterling  exchange  are  the  prices  at  which  the 
light  to  receive  certain  sums  in  England  is  bought  and 
^nid  in  Xfw  ^'„,•k  and  varies  like  everything  else  ac- 
"ifding  to  demand  and  supply. 

1.).').  The  pound  sterling.-  The  monetary  und  of 
I'.ngland  is  the  pound  sterling,  which  cont;iins  IJ.'J 
-lains  of  pun  gold.  Sincr  dui'  monetary  luiii  is  the 
•i"llar.  com|)OM'(l  of  •_'.'{.•_'•_>  grains  of  gold,  it  is  easv  to 
'■alculate  that  the  English  soxcrdgn.  uhich  is  the  name 
if  the  coin  containing  a  pound  stei  ling,  is  exactly  e<|uiv- 
ilcnt  to  $f.S<;(i.*).      In  otjk-r  worus  an  Knglish  sov<'reign 


.>^^ 


:i'mv.nmt 


\im 


l^()  M()M:V   AM)  ILWKlNCi 

c'Uii  he  iaUcii  to  a  rnited  Stales  mint  and  rccointd  into 
1.8«Wi.)  AiiRiican  <4'ol(l  dollai.s. 

Tlicrc  is  a  «ri-eat  difrcrcncc.  however,  between  the 
li^dit  to  receive  gold  sovereigiis  in  Knghind  and  the 
})()ss(  ssion  of  gold  sovereigns  in  the  L'njted  States. 
A  gold  sovereign  in  England  will  not  pay  a  debt  in 
America  unless  it  is  first  imported  into  this  country  and 
coined  into  legal  tender.  Therel'ore  it  is  worth  to  its 
American  owner  .$4.8(;(>.),  less  the  cost  oC  bringing  it  to 
this  countrv,  mdess  he  c-an  re.ijize  n|)on  it  ])v  sellinu'  the 
right  to  receive  it  in  Kngland  to  some  one  who  wishes 
to  use  it  there. 

l.'if).     Cost     of     Shipjlimr      <roI(}. The     cost     of     sllipjjilirr     nohl 

across  the  Atlantic  varies  sli^rlitly  from  time  to  time,  'i'hc  fol- 
lowing; fin-uits.  showintr  the  cost  of  -hippinn-  .>;1, {)()().()()()  1,,  u-,,l,| 
from  New  York  to  London  weie  furnished  hv  the  repriseiitat ive 
of  one  of  the  largest  New  York  bankiiio'  houses: 

ln\(>tcd  in  fine  I)ars,  L':5.;2f^O,OflO  pfr $1,()()(),0()0 

A.s.->ay  office  premiinn  on  l)ar--  1  c(iit>  per  SKIO.  .  .  .  }■()() 

Freiojit  rj  '.i^>  per  c.  nt l.r)()2.50 

Insuranci'  1    Hi  p,  r  cent (J^o 

Packing  an<l   cartage 70 

$l,()()!i.().-)T.")') 

The  Hank  of  I'',n<rlan(rs  price  of  n-,,|d  variis  TTs.  !)'  il.  to 
77s.  lOljd.  p,  r  ounce,  I-liiglish  standard.  DHi-':;  (inc.  The 
mint  coins  an  ounce  of  ^old.  Ilngli^h  standard,  into  77s.  10  1  .,d.  ; 
but  the  H;nik  (d'  laiyland,  with  ulileh  il  is  the  cu'-toni  of  the 
l)ullion  l)rokrr>  to  dtal,  usuallv  pav>  a  fraction  less  than  this 
sum,  thus  savin;;-  its(  If  from  lo^-  of  int.  rc^t  while  the  huilion  is 
being  cointd.      It  i-  assumed  b.low  that  tiie  H.mk  pays  77s.  lOd. 

i :■-•-'  -^   , 

4H,;J7r)  oz.  fine   eipial  .■)L',77^.7  o/.  91  (i  U  •^  fine. 


r.-")') 


DOMESTIC  AM)  FOKEKIX   EXCHANCi:         liiT 

n2,772.T  oz.  at  77s.  lOd t;,'2().')J57  i 

Deduct  Muidrv  rxpoiises 4, 

Not  receipts  in  I,oiuloii £^205,370 

Cost   of  soverei-rn    (  1  .()()J2,()7r)..')  -;-  «();),;J7()) $4.88^2 

-Mint  j)ar  in  the  I'liited  States 4.8665 

Cost  of  sliipineiit  jk  r  sovi  reifrn .45  .0157 

No  loss  of  interest  is  included  in  the  fore<^oin<^.  'I'he  New 
\nrk  l)anker  uho  furnished  the  finiires  In  Id  thai  no  sucli  item 
«as  iiiv<)ivi(i,  for  he  >old  sterhn^-  e\chan;4e  as  soon  as  he  made 
-hipment  and  so  was  never  out  his  money  in  consecjuence.  If  wo 
nil  hide  interest,  we  raise  the  cost  of  shipnuiit  to  .'i^.()li)7  per  sov- 
t  reign. ^ 

157.  The  minimum  ^old  point  for  sterling  exchange. 
— Calculating*-  the  total  cost  of  shipping  (rold  between 
America  and  Kurope  at  the  lowest  fionre  oi"  two  cents 
pd-  pound  sterlino-,  it  is  easy  to  understand  why  .$4.8405 
is  called  the  niininnnn  gold  j)oint  for  foreign  exchano-e. 
If  there  should  he  an  extraordinary  supply  of  foreign 
Inlls  I'or  sale  their  price  under  normal  conditions  could 
never  go  far  below  this  figure  because  there  would  al- 
ways be  some  international  banker  who  would  be  wilHng 
til  pay  for  them  the  moment  there  was  a?iy  profit  in 
Inlying  them,  for  the  purjwse  of  importing  the  gold, 
iiit.r  they  had  l)een  cashed  in  England.  This  mini- 
mum price  does  not  mean  that  the  value  of  forciirn  bills 
is  an  exception  to  the  law  of  supply  and  demand,  but 
that  when  the  price  falls  below  a  certain  minimur  1  there 
arises  automatically  an  u?ilimited  demand. 

i.>o.  x^i <i.t <• /7i ,<•  ;7f"  ,i;i7i(7  jj'iiiii  /()/  fiiiriin^  CiVc/iange, — 

'  Johnson,  "  Moiicv  anil  Currencv." 


\ilH 


M()M:V   AM)   i{.\NKI\(; 


i! 


On  tlic  olluT  IkukI  the  price  of  sterlino-  bills  may  not 
rise  iiliove  Sl-.HSC),;  nndcr  normal  conditions  'cause  at 
that  ti<y\irv  there  is  always  an  unlimited  supply,  so  that 
no  one  who  wishes  to  buy  need  pay  any  more.  The 
reason  for  tiiis  unlimited  supply  is  this:  The  interna- 
tional hanivers,  seeing-  a  chance  for  profit,  will  sell 
forei^i)  exchange  above  the  maximum  n()ld  point 
whether  or  not  they  iiave  a  credit  balance  ahroad. 
Lackino-  such  a  balance,  they  buy  ^'old  with  the  proceeds 
of  the  bills.  As  soon  as  they  have  been  issued  they  ex- 
})ort  o-old  to  Kuroj)e  so  that  it  will  arrive  at  the  same 
tim  the  bills  are  presented  for  j)ayment,  thus  closin<f 
the  transaction  as  far  as  the  issuer  of  the  bills  is  con- 
cerned. 

1.5!).  irii//  sfcrliiiii-  i\ir}ian<^c  fiuii/  fall  hclozc  ^i.HiCyr^. 
— We  have  seen  that  theoretically  the  price  of  demand 
sterlin^r  cannot  fall  much  below  !i<i.84t;.3  because  of  the 
great  demand  on  the  j)art  of  the  haid<ers  when  it  tends 
to  fall  l)elow.  There  are  conditions,  however,  under 
which  the  price  may  fall  considerahly  lower  without  call- 
ing- into  existence  this  demand.  In  March,  1907,  the 
price  fell  to  $4.8.3  for  a  time,  and  in  the  autumn  it  fell 
still  lower.     There  were  several  reasons  for  this. 

( 1 )  The  rate  for  call  loans  in  New  York  was  very 
high  and  the  bankers  who  would  otherwise  have  pur- 
chased the  exchange  did  not  do  so  because  it  was  more 
l)rotitahle  to  loan  the  money  than  to  invest  it  in  the 
exchange  which  would  have  tied  it  up  for  at  least  two 
weeks,  the  time  recpiired  to  send  tlie  bills  to  London, 
exchange  them  for  gold,  and  ship  the  gold  to  this 
country, 

(•2)  The  reluctance  of  the  American  bankers  to  with- 
draw gold  from  Kngland  at  a  time  when  it  was  needed 
Uiere  and  when  there  was  danger  of  a  rise  in  the  dis- 


i)().M!>r!(   AM)  roui.K-'^  !:\(!!.\\(;i:      vv.) 

Miml  rate  il'  tlic  rf.sLive  in  iUv  H:ink  ol'  Eiiglaiul  were 
■  iidaiiyci't'd. 

(.•{)  The  (linieiilty  in  uetliiiL;'  ^old  for  exi)()rl.  Tlie 
ImIIs  eould  l)e  j)aid  in  notes  and  altliouLiii  the  Hank  id' 
r  ii'dand  must  redeem  all  notes  when  asked  to  do  so, 
'i\  las  the  I'i.ii'ht  to  ])a\-  out  coins  of  ks-,  than  lull  wtinlii 
and  make  a  (hffereneL-  of  a  itiiI  in  the  I'  in  t!ie  protit  of 
the  exporter. 

(1)  The  hi^^h  |)rie<.'  of  n'old  hiihion  in  London.  To 
,,\oid  the  loss  incidental  to  shipping'  coins,  the  at)i'asioii 
;ind  the  li;L;'lit  weiuht,  bars  of  ocjld  must  he  pui'chased 
ill  the  market,  (iold  bullion  is  marketid  in  London  as 
;i  commodity  hut  with  (ixed  limits  to  lliictuation  of  price. 

(.))  The  premium  on  currency  in  New  ^'()rk  in  Xo- 
\  I'liiher.  1 1)07.  (hie  to  the  susj)ensioii  ot"  cash  j)a\nients  l)y 
'he  hanks. 

!<;{).  The  gold  iiKirhct.^-'Vhc  hulk  of  the  <y()\d  \)Vi)- 
iliiced  in  the  worhl  conies  IVom  South  Africa  direct  to 
London  to  the  aiii'imit  of  ahout  i^2..")()().()l)()  per  week, 
file  hullion  brokers  meet  on  Mondays  to  liade.  Some 
'if  them  lia\'(.'  cei'tain  amounts  of  bullion  to  dispose  of" 
iithers  lia\i'  buying'  orders.  They  beL>in  by  comparing- 
iMites  and  (juitt'  a  xai'iety  of  interestin<4'  situations  may 
f'e  (hsclosed.  Thei'e  may  be  a  big'  amount  to  offer  and 
a  few  small  buyers,  or  vice  versa.  Sometimes  the  com- 
petition for  the  gold  is  \  ^ry  keen. 

'i'lie  Bank  of  iMigland  is  recjuired  to  pay  on  notes 
!or  uold  (to  buy  gold)  at  the  rate  of  77s  \h\  |)er  ounce 
'lid  this  fixes  tlu  minimum  price.  On  the  other  hand, 
I'lc  Hank  Is  under  Kiiai  obiii^atiiin  to  irdit-m  its  nolrs 
lor  gold  at  the  rate-  of  77s  10'  ._.d  [)er  ounce.  This  ap- 
iH-ars  at  first  si^ht  to  hmit  the  srliinu'  price,  but  on 
;i('coimt  of  the  right  of  the  Hank  to  pay  out  light  w  tight 
coins  for  the  notes  the  maximum  is  raised  to  practically 


■■^m^ 


130 


M()M,^■     \\l>   HANKIVc; 


7Hs  per  ounce.  Tiicrf  is  a  tiu-it  iiiKlcrstamliii^-  that  tlu 
]5aiik  is  lo  liavc  |)ixtV  rcncc  wluii  il  is  willing-  to  pa\-  the 
best  i)ricv  ollV  red  hy  any  other  l)i(l(ler. 

The  fact  that  the  hank  of  Falkland  must  buy  and  sell 
all  the  ^old  oilVred  at  the  jjriees  fixed  hy  hiw.  makes  it 
very  ditlieult  for  Knnjand  to  hold  her  supply  of  ^old 
when  other  nations  are  hiddinu'  hiuh  for  it  \.<  maintaiii- 
in^-  hi^h  interest  rates.  Kn-^iand  for  this  reason  is 
called  a  "fnc""  oold  maikit.  The  Hank  of  Kim-land 
exercises  control  over  the  u'old  su|)ply  hy  nianiijulatin^r 
the  rate  of  discount:  a  rise  in  the  I'ate  dise()ura<res  both 
foi-eiu'n  and  doiiustic  borro\\in,L;  not  onl\  at  the  Hank 
but  i  I'om  all  othei-  banks,  which  are  I'oi-ced  to  follow  the 
had  of  the  Hank  in  the  rate.  'I'his  means  of  control 
is  ef}'ecti\e.  but  it  \y  expcrsixc  to  tlii'  business  interests 
of  the  country,  to  whom  the  difference  of  1  per  cent 
in  inteivst  pa^inints  mea)"s  a  ^ixat  deal. 

ini.  y^r////.'  of  France.  Din'in^-  l<)()7,  the  svstein  of 
I'rance  seems  to  have  lurii  s.ipei'ior:  while  there  were 
strinoeiicics  in  all  otlu  r  markets,  while  the  rate  of  the 
liank  of  Kn<>land  .\as  held  for  a  lonu-  time  at  (»  per  cent, 
customers  of  the  F,ank  of  France  could  always  get  i  unds 
at  W  i)er  cent.  The  Hank  of  France  has  a  monopoly  of 
note  issue,  but  it  is  not  compelled  to  redeem  its  notes  in 
gold.  \V'hen  it  desires  to  j)r()tect  its  gold  reserve,  the 
liank  of  France  refuses  to  ])ay  out  gold  in  (juantities 
for  export  except  at  a  premium.  This  ])rcmium  is  never 
so  high  that  would-be  exi)orters  are  induced  to  gather  up 
th"  outside  gold  at  considerable  ex])cnse.  but  it  is  liiLdi 
enough  to  discourage  knding  in  foreign  markets  l)v 
l''rench  capitalists  without  interfering  with  foreign 
trade. 

Proximity  of  the  <|uotatlons   for  demand  sterling  to 
le  minimun.  or  maximum  gold  [joints  indicates  an  ap- 


tl 


i)r)Mi:s'rir   and   iojir.K.x    i-.xt  iiANc.i;      in 

iii(»;tfliiii^  r\|)(irt  or  iiii|)()ft  (if  ^old.      Hjol!  (luotations 
iiMlicalc  exports,  whik'  low  (|iioiations  itidicutc  iin])orts. 

!(■.•_'.  (i(,l(l  •v////>//'r/;/.v.  SliijMiitnts  of  ^^old  intn-f'ere 
with  the  basis  of  cirdit  aii<l  arc  tlierct'orc  can-fiilly 
watclicd  I)y  cvrryhody  wliosf  interest  c'lii  he  afFected 
!'\-  clian.i^ed  coiuhtioris  in  the  crecht  market.  The  rate 
III'  interest  and  especially  the  rate  on  eall  loans  is  sonic- 
'  lines  ehanued  (piite  suddenly  on  this  account.  A  stid- 
il<ii  weakening- of  the  call  loan  rates  is  very  likely  to  lead 
to  a  eallinu'  of  loans  hased  on  secuiities  as  collateral 
■  ilii  the  result  that  stocks  arc  likely  to  j)e  thrown  on 
hi'  market  for  sale,  thus  depressino-  prices,  ''"his  ex- 
phiins  the  close  relation  hetween  the  foreijiifn  exchange 
iiiai'ket  and  the  st<ick  CAchann-c. 

1<!.'}.  Oiir  forcif/n  roiii !>icrci'.-~\\:  is  n  well-known  fact 
that  aecordin,u-  to  the  ollieial  Hniires  i>iven  out  at  the 
C  ustom  House  our  ex])orts  considerahly  exceed  our  im- 
p'lts.  The  fi<rures  for  the  fourteen  years  fading  with 
l'.»i;{  appear  as  follows: 

>r\risTi(s  oi'    i()i!i;ic;x   tkadk   oi-    imti;!)   stapes.' 

■|"|'l^''  niniitli-.  Total  T.,*;.!  i'.mvss  of 

'  iiilinjr.luiif.id.  Import-,.  l'',\|)(>rts.  I^lxports. 

'"" S    sio.nn.isi  .Si.iiOi.isn.os?  i?,u),.)H.s!)8 

i'"'l S.':i.l7,M(i:>  l.l>7.7(il.!)!)l  (idl- :,!)  '  S 'li 

'''•'-' !)(t;i.;i.'(i,!us  i.;i«^i.7i<\i(ii  V7s.:i')s,k->;5 

''"'•5 l.O-'.').'.  I!'.-';'.T  l.i.'O.l  1 1.(i7!)  S'U.l-'J.U.' 

I'""- !>itl.():.r.;',71  1,M1().8.'7.J7I  .Kiil.T;{!1.<>i)() 

''"•■"' I.117.)l:i.iiTI  l.jl8..j(il.(i(i()  4(II.()IS„jli.> 

"""• 1. -'.'(;.:,():!.-' I J  i.Ti:{.s(ii..,)()()  .ooi.^dj.o.u 

I'"'' l.CH.lJl.i  ?:>  l.sso.s;,  1.078  U(i.iJi>,(i.->;j 

""'"' i.i!)i.:ui.7iij  i,S(i(i.77:{.:iKi  (iii(i.i;ii. .•.:!. 

!'"»!> i.::ii/).>i)..'n  i.(i(i:}.()i  1,1(11.  :v>i.()!)(i.sHo 

'''"' 1..),>7.HI!).<)SS  1.7U.i)Si.7.'()  IS7.1(il.7:i.' 

'''II l..').'7.Jjr,, ]■!.-,  :.'.()1!).:{J(I.10>)  ,),'\()<n.il!lt 

'"I- l.ii.V{..'(it.!i:U  :,:oi,3.'.',in<)  .r,l.(i,-.7.l7,-, 

'"l'5 l.si:i,()(is,.':u  J.lCj.sst.Uf)  (i,i.\s7:i!(M.j 

These  figures  indicate  that  we  are  .selling  a  great  deal 

!oie   ihan   w  are  i)uying   from   foreign  countries  and 

'III   natural  infeieiiee  would  he  that  we  receive  the  hal- 

•  mce  due  us  from  this  trade  in  gold.     This  is  far  from 


1.12  iMOM-:'^'  AM)    RANKING 

l)tiii<4-  the  casf.  Ill  tlif  vfjir  1!)()S  onv  cxfcss  of  i-xports 
Mas  $(»«»<>.()()().()()().  \\  liilc  our  'xccss  iiiipdi'ts  of  Liold  wwr 
$70,000, 000.  In  thcytar  100.)  our  fxct  ss  of  (  \{>oit.>  was 
S<  I-OO.OOO.OOO  while  we  aciually  (Apnit.d  S.'JU.Ooo.oud 
worth  of  uo!(L  'I'hc  liuurrs  for  tlic  ( -■  poi!  and  mip'oil 
of  ^<i|(|  \\iv  cjnht  I'cccii!  ycai's  ari'  uixui  hi'lM\\.  '|"!;I> 
ciniil  ycai'  a\c'r;i,m'  nl'  iinp.iils  is  souk^'.  hal  hiulis  r  than 
in  prc\  ions  years. 

M(>\i',\ii:\  r  oi    (■.(»!  I)   ro    wn  i  kom    tiii'.  r\"i!i:n  -;r\ri:s 

I'v\  clvi' iM'inlli^  'I'lital  Tot.i!  I''.\i(  >^  i>t'  (■'.m'css  iif 

(  nditij:  .Iiiiii- J<i.         Iin|)iirts.  l'.\|ioil-..  liiiiiDrt--.  l-'xports. 

I'lil.-) ,<    .Vi.iiis.iiiii  s  !».V.!)|.(I.>1  .*;tS,!M,>.0(),i 

I'lKi <)(i,.'ji,ri«  :is,;,7:!.;.!n          i«,)7,'ii^.i.i'> 

I'lor m.Mo..M!>  .".I.:!!)'!.!  ;<(          (i:{,i  i  i.o;  s 

Ml  IS ;     ..  I  is.:!:t;.:i.'i  7.'.l;{.'.'t.'l             7.>.!in|.  iu; 

l!li<) I  l,<i(l{.!»sll  !M..",:{l.sls                                                U..).';.S.'() 

l!)lii j:t.:!:!'>.!> '•.  I  !s..-,(i:{..M ;,                                      :.•).. '.';i.:il(i 

"111 ;:!.!. nt.iiit  .'.'.i(»!).<i.>:{           .>l.()!>;,:i(io 

111!.' |s.;i,{ii..>(iii  )T.:i>'    .s                                       s.;J<)l,s|s 

Kil.  I ii\isihlt'  iliiiis  (if  I'oriiiiii  !i'(i(lf.  ]\\vi\  thon^'h 
we  do  not  n'ct  paid  lor  our  (  \ct  ^^  of  txpoiis  in  Ljiild, 
n<  \ c!'!!)!  less  wi  ai'c  ])ai(l  Im'  tli<  ui  in  sonic  lorni  oi- 
oilier.  The  tim.res  ot'  inip.H'ts  .■tnd  exports  include  only 
the  noods  wliicli  p.'.ss  throu'di  the  (  iistoni  I  louse. 
'riiei'c  are  many  kinds  of  tr:i  l^actiolls  re*|iiirini4  |'ay- 
ni'  Ills  ol'  iiione\  which  are  ne\  er  it  ported  ;it  the  C'us- 
toiii  House  at  all  and  \ii  Ihtir  eil'cct  upon  tli.'  trad( 
halanei'  is  the  same  ;is  nu  rcli;indisc.  In  tli(  last  d; cadi 
tile  capital  of  the  worhl  h,is  hccome  more  ;ui<l  iiioi'c 
niohilc  ;is  the  I'acilitKs  for  lojininy  and  iiucslin^-  in 
foil  i^ii  coiinlrics  n.nlicd  ;i  lusher  pti  lection  through 
tilt  hank-,  and  stock  (  \eli;inu(s.  Knt;lainl  has  .always 
'lulled    ;i    \{'v\    hiri^'c  amount   of    Aiiieric;in   stocks   ;nid 

ll{tll{lk._       l*«'l)l'«'k^;ilt^itlJl'       llll^j'L^ll>li>tW  111       jtlll*      lllill;i.jl*j«><.J  11         Ik. 


l)().Mi:sri(    AM)  lOKKicN  i:\(  ii.\N(.i:       i;5;i 


s;ii(l  lli;ii  tlif  l;ii-i4(.r  |).ii't  of  llic  (';ij>ii;il  iisrd  to  i  iislrucl. 
(lur  railroads  IkToiv  ISSo  Ik1oii<^(.(1  to  Kii«4laiul. 
Aimrii-aii  stciiritirs  arr  so  fxttiisivfly  dealt  in  on  the 
London  cNclian^uv  that  the  closinu'  (juotatioiis  on  the 
London  |)ti((s  I'or  them  at  Ihe  end  of  the  day.  uhieli 
coiiK'.  dne  to  the  difl'creiiee  in  lime,  at  the  opening'  of 
nwr  own  e\ehan;^es  in  tlii-^  e(inntry.  Ii;!\e  a!i  itiij)ortant 
(  tl'eet  ni)on  (|iiolations  lieii.. 

1»;.*).  M(i:'t.  lilt  Ills  of  cdjjildl. — In  I'ceent  years  the  well- 
known  thrift  of  the  l-"reneh  people  has  induced  our 
linaneiei's  to  make  nnnsiial  eH'orts  to  estahlisli  a  mai'ket 
for  eel-tain  American  seeniitics  in  Paris.  'I'lie  Pennsyl- 
\ania  Hailroad  Company  sold  a  very  larue  is^ne  of 
!:onds  in  that  eonnti'\-  and  other  lai'<.ti-  coiuni'n^.  notai)ly 
tile  Lniied  States  SI  til  C'oi'poiation.  ha\  c  from  time  to 
,iiii(.  heen  eaii(  il\-  se-kinu  Ih  pri\  ije^c  of  listm<^'  their 
,(  cin'it  it  s  on  the  I'aris  l!our^e. 

'11;  I  'nit((l  .Staus  's  jusl  cominu'  t  .  he  a  market  for 
r(,r(  ion  si'cnrities.  'I'ne  eliii  f  foreign  secni'ity  which  is 
it  |)rest  lit  (jiioted  on  our  t  xchanu'c  is  the  Japanese  war 
honds.  I*oi-tions  of  bond  issues  of  .South  .\merican 
st.ites.  .v.ueli  as  I'ciii  and  Chili,  are  occasionally  rdlotted 
lo  American  hankers  to  he  disposed  of  in  this  eounti'y. 

The  moxcment  of  these  securities  to  and  fro  is  the 
inosl  potent  cause  of  Uuetuation  in  the  for<i,nn  exchaiiiie 
niarktt.  .Stocks  arc  |)rohal>ly  the  first  lliiuL,  in  the 
eountrv  to  feel  the  eireet  of  the  tendiiiey  to  higher 
price-.,  cau^iil  li\  an  inei'  .id  amount  of  money  or 
iredil.  .\  \(i\  small  rise  ..,  die  ipiotations  of  stfinities 
is  ■.uilicit  nl  to  cause  i-onsideral)!<  m  lliuL;  of  thtni  in  this 
niarkcL  which  has  a  t(  ndency  to  create  a  d(  niand  foi- 
foirigll  e:   'iiiUi^^'e   to  |»a\    for  them.  Ih  nee  ;i   ris(    \\\   Ihe 

<•  I  .    ■ 1  .  .•  !     1  ■  1  I 

j»l  !(•(■  Of    C  Xiiliiii  ^;i    iiii  i  i  i  <    \  j  ><  n  i  >  >  >i    ^   m  i  .i  i  i     1 1  n  u  i  '  ■  i. 

This  expl.'iins  wli\   an  issm   id'  p.ipti'  money  can  drive 


Mo.M'.V    AN!)   H.\.\KIN(i 


;in  r(|ii;i]  ;iiii(Hiiit  of  yold  out  of  the  couiilry  s.)  (|iiit'kly, 
fxc'ii  hel'ori-'  tlu'  prices  of  coniinodilics  li;i\c  f'llt  tlic 
(.•luiiii^T.  Tlif  iiioir  highly  (Kv(I(»|km1  tlif  tiiiaiicial  iii- 
stitiilioiis  of  tile  world  iln-  uioi'c  sciisitne  will  cvri'v 
country  l)cc-onic  to  pricc-c  iiaiiwiny  inliucncfs. 

1  ;>«I.  Interest  (tnd  (iividiutl  j)(iifi)U'iit'{  to  fdnl^ii  .stoci,' 
hdidirs. —  Auotlur  item  of  trade  uliicli  atl'ccts  the 
balance  without  appi'ariii^'  in  tlic  Custom  House  figures 
is  tlie  iiitei'cst  and  di\  ideud  payments  made  to  the 
holders  of  American  securities.  'I'hese  payments  are 
madi'  in  foreign  exchr.nj^'c  and  ci'cale  a  dtiuand  I'oi-  it. 
hence  tlicv  ha\e  a  tendenc\-  to  lil't  the  i)riee  of  foreii'-n 
exchange  away  from  the  n()j(l  import  point. 

KI7.  Freight. —  Most  of  the  merchandise  which  is 
moved  to  or  tVom  the  I'nited  States  is  cai-i'ied  n.  foreign 
ships.  Since  !H4<>  the  Americans  ha\e  found  them- 
sehes  at  a  disadx  anlanc  compared  with  Hnu'land  and 
(Germany  in  the  cariyiny-  trade  of  the  world  and  the 
result  is  that  wt'  must  i)ay  freight  chai-i;es  to  foi'ei^n 
companies.  These  paymints  ai'c  made  in  forei<;M  ex- 
I'hann-c  and  lu  Ip  to  create  a  demand  to  oU'set  the  exces- 
si\f  su|)ply  of  hills  on  the  mar-Uet. 

IC.H.  Tdiiri.st.s-.  'riui'e  is  still  another  ittin  which  does 
not  appear  in  the  olllcial  tiyures.  .Since  I'anopenn 
travel  has  heeome  so  popidar  there  has  aristn  a  lar^e 
(Kmaiid  for  letlii's  of  credit  on  tlu'  |)art  of  tourists. 
The  elfeel  of  tjiise  Irtti  rs  of  credit  is  to  create  a  de- 
mand for  liills. 

'I'hese  four  itrins.  namely,  secui'ities  owned  ahroad. 
iiit<i(st  ;uid  di\,(irnd  |)aymiiits  to  the  hohh  rs  llniiof. 
fi'i  lyht  I'lnri^cs  to  fore  i,i4n  ship  owners,  and  iouiists'  ex- 
penses   in     l*'ui'o|)(     ill    excels    of    |''urope;ni    tra\(l    in 

\   tiw.i.i/-;!  1..  ......._.... t  !!,.,        ;    ;  i::!;     ;:  L.:,!         ..»'         •! ^    .,«' 

^  -  1  ii"-  ;  !*•-  ct         :  \  j  ,* ;  "^  rjv  : ; :       ;  : :;        v  :  j  i ; .' ".  .1  ii  i :  i       : ;  i        ;  i  i." '      i   \\\  SS      w  i 


i)(jMi:s'ri('  AM)  !'()Ui:i(..N  kxciianc.k      \So 

-i)()(ls  we  export  ovci    those  wo  receive   fioiu   foreign 
eDuntries, 

1G9.  Foreign  i\Vi'liaiiij,i'  ntdrhtt. — IJelow  are  repro- 
(iiietions  ol'  a  daily  article  on  the  foreign  excliauge  mar- 
ket from  the  ITdll  Sircii  Journal: 


[fVljiiiiiiv  ^IL  1 !)()!). J 

'I'lic  f'oreifTii  fXciiHii^c  iii.irkit  opfind  >irnn^',  with  (liiiiaiul 
-trrlinj^'  l-.HlHiOQi  4.H7()">,  up  ♦en  points  from  Saturday 's  c'lo->i'. 
I'liiTc  «us  a  o()()(l  iiKiuirx  for  riinittancc,  attnliiitcd  to  fonioii 
^1  lliiiir  of  stoi'ks  luri'.  and  on  account  of  the  London  sittknuiit. 

'I'hc  market  n maiiicd  ^tron^"  for  tlic  tir>t  liourV  tradiu"',  in 
uiiich  demand  ^tcrlin<;-  went  to  4.S7().")(f^  i.S'iTO.  Init  it  hccanio 
ividciit  tiu'M  tliat  till  re  \\a^  not  ^ulficient  l)uyin<.''  })()\vcr  .uid  the 
market  t llefeaf ter  ^okl  oil'.  'I'lie  openitii;'  >tren;4tli  was  iar^'iiv 
iiiHuencM'd  l»v  the  weak  opening"  of  the  >tock  markit  and  I.on- 
lion's  salts  of  »toek>  here  uere  eNulentlv  o\ere>t  nnatc  d.  Tiierc 
»vas  soi'ic  l)inino-  ot"  st(  i-hnt;;  calik  >  toi"  the  settlemiiit. 

Iv  the  aft(  rnoon  liiddlnii  \\as  nicatlv  withdrawn  and  the  mar- 
ket  showt'd  fui'thi  r  ea>e,  cKi^in;^'  ulth  demand  ^terhn;^-  i'H~[.')(a] 
IHUTA),  oil  fifteen  points  i'roni  the  o])eniii^  and  ott"  (i\i^'  ])oints 
iiM  tlie  day. 

[May  ;k  1 !)();).  I 

The  foreifrn  i\ehan^i'  market  open*  d  >leadv.  witli  demand 
-ti  rhn^    kS*  M)(('   KM  !■•').  unehan^iid  t'rom   I'rida  vV  t  lo>e. 

I'he  k'ir;4e  ~hoil  inlcrist  which  !■>  said  lo  iai^I  in  ( Achano^c 
v>.i-  t'iirth«r  in  i  \  idi  nee  loda\.  'I"!ie  coveiin^'  moveiiMiit  that 
s|  irled  in  on  Thiir-dax  \\a-^  c<iiitimied  uilh  \iL4or  diiriiiij;  tin' 
-liort  da\'^  >e^>ion  <!■  iimikI  -terlini^'  ad\aneid  (iflien  points.  U 
:ipp<ar>  that  a  con^ideralik  part  ot  the  pii -.i  nt  iiio\  i  im  iit  is  ihie 
'"  tiio  iniinipid'it inn  ot  one  in->tilntion.  "hieh  i^  thoiiolit  to  hi' 
"rij^j^in;^'"  the  market. 

The  maikit  clo>ed  stroiiL!,-  with  deiii.ind  sti-rlili;^  4'.87.')5(«J 
t  S7o<'i   lip   iiiieeii    poiiii>   on    iiie  iia\. 


^n>^l.^   and  uankinc; 


|l  iii:i|iilr<l   l.\    I!(  .l.ii'ir.ii  \  (  ,..  I 
('mI)Ii-,.  Drm.iiid. 


(>()  (lav- 


,  .,         ,.  .  ■•  ..,.1  ill,.  ,)i,    imys,. 

SIcThn- o|,,.n 1   >7i„.,a  hT(i,i  i   s;i,i,,i   >,;,,  ,  >,,;  „„a  n, 'i 

''"     '■'"^'•" I  ^::o;a  s:7.-i  i  s;  ,,,,,i  ^;„i,  t  s(i;!.i;.i  sia, 

170.    r:.fjilninili<ni    of    (oiirlcs.      One    purposr    in    n- 

l)rillti!|M    thrsr  ;:itic|c,   is   to  ;ir.  1 1 1;| !  1 1 1    llic  s    dticit   with  Hir 

iiH;iiiiti;4  dl"  [\\v  .l.nly  Mioiuy  ai'ticlcs. 

'•Tlif  Inicion  fxclKiii-v  iiKirkd  opoic-l  iij)  ivn  points 
IVoMi  S;itiii-(l;iy's  close."" 

^  -^  i>"iiit  iti  foiri-n  e\('li;iimr  is  I  loo  ,,1'  one  ccni. 
'I'lic  ■Loiidoii  scttlciiicnf  iTlcis  lo  tl)c  iMio'lish  pi-;n- 
lic  of  sdtlino'  stock  cxcliaii^v  i  raiisiiclions  fort.  ■\a\y. 
'I'li.-it  is  to  say.  if  a  customer  uix'  s  an  onkr  to  a  -aiikcr 
'"  '"•>■  '"•  "^'11  l'^'  i>  ii"i  r.<|uiiv.l  io  ,kli\,,-  or  receive 
"'^'  ^<'''"iii<^  unlil  (lie  next  s.tilin-  ,late.  Because  a 
L'l-cal  many  specnlators  (iesir,-  to  close  up  their  com- 
'"''"""•-^  '"I'-'l'  'lie  s(  tt|,,M,!,t  ,|a!e  there  is  like  iv  to  l,v 
n.Msi.leral.le  fo!vi-n  I  ra-hn^  jnst  hefoiv  set  t  k  nien't  tiiu.', 
11  '  i<  foreiMiKix  j|,.,\t.  1,^,,.,,  |„|yi||„.  our  seciirilies  f..r 
tenipoiaiy  sp.cn'al  ion  tluy  ai  likely  to  close  up  the 
track'  hy  sellinn.  If  t|„y  l,;,^,,  h.m  "selling.'  short  they 
arc  likely  to  pure  liase  s<cuiilies  just  hefore  the  settle- 
liu  nt. 

Tiic  oiKiiino  sin  n-lh  was  largely  inlhienced  hv  the 
we;  k  op.niiiM  of  th.  call  iiiaiket  aiid  Li.ndoii  sales  ol 
>toek   here   were  i  \  id.  nll_\    o\  crest  iiii;i  I  ed."" 

'''"■  '^•"' ^  "I"  Allien  VII  stocks  hy  L,)nd.in  traders 
v.ould  iialni.lly  <rivcris.  to  a  demand  for  e\eli;n,-e  with 
^^'"'■'i  '" '^"  "!'•  '.o\\.i  piices  in  the  .\(  u  N'.irk  mark.  I 
""'"'''  iiidu.v  for.iun  s(  llino'  mid  thus  stiviiytlKn  Mir 
fort  i^n  (  xchaiii^'-  mark'  I. 

"''"'■•     ""^  '^"""'   I'll}  iii,u  of  sierliiiM    cahles   for   the 
sett  l(  iiu  lit." 
!-  1     /  ■.,/./.  . 


\     ...11 


credits    l>_\     iiiiaiis    of    c.ihlc    | 


•  ii>  .Ki.i      liu        I  I  iiils  I  (  I  (  iK-e      ()| 


iifs.sa^fs.      Dealiis    in 


-sc- 


i)()Mi.>'ric  AM)  roKi.Kiv  i:x(  n.\\(.i:       i.;: 


ii:iiti(s  wild  liiid  tli.'il  llicy  li.i\c  a  lialaricc  aii'aiiisl   tin m 

lust  Iid'orc  scttlciuciit  tiiii''  in  1 don  |ia\c  not  sullicicnl 

lime  to  hny  otlui-  Torrns  of  stcrlin^^'  c\c'liani>c  and  send 
iliiiii  l)y  mail.  In  oi'der  to  meet  tlieir  ohli-^-utions  in 
London  they  arc  ol)linrd  to  provide  Imids  in  the  market 
at  onee. 

■'A  lai'oe  short  intei'est  wliieh  is  said  to  exist  In  ex- 
( liani^e  was  further  in  evidence  to-day." 

I'oiciwn  exehanue  is  hoiiL-lii  and  sold  s])ccuhiti\el> 
ill  much  the  same  way  as  stocks.  If  llic  dealer  hclicves 
Miat  the  ;)i-ice  is  uoino  down  in  the  near  future  because 
of  the  prosjx'cts  of  an  unusual  supply  of  hills  or  because 
"I'  ai!  unusually  liyht  demand  he  mav  "sell  short." 
That  is  he  will  contract  to  provide  exehantic  at  a  ^'iven 
price  at  a  futin-e  time.  A  short  interest  cxistijiy  in 
lerlino-  ix(  hanue  will  have  the  same  effect  u|)on  pi'iecs 
"f  cxchanyc  as  the  same  (ondiMon  existing-  in  stocks. 
.\  person  who  has  sold  slioit  must  ultimalely  Iniy  the 
i!iin!4  li^'  has  aL'i'cd  to  delixcr  and  this  buxirm-  or  "cov- 
'  riuii'  by  shorts  is  likeiy  to  sustain  prices  e\  en  in  the 
I  ace  of  ad\ crse  conditions. 

■"'riie  coMiiiiM  movement  that  started  In  'I'hursday 
w  as  continued  with  \  i;>()r."" 

I'or  some   reason  on   this   particular  dale   the   shorts 
I'oneluded  that    prices  wen    nolno-  hiulier  and   made  all 
l^istc  to  purchase  in  onk  i-  to  make  dilivcri-s  bcd'oif  the 
limitations  Went  hii^liei-  yet. 

It   appears   that   a  considerable   |)art   of  the   present 
■mveuient   is  due  to  t  h«    manipulation  of  one  institution 
^^hieh  IS  thounhl  to  be    i   m^in^"  the  jjiarket. 

Here  a^ain  w  <  lind  anothrr  similarity  Ixfween  the 
market  for  fort  iyu  exchange  and  tjie  stock  market. 
r,\ehanu.   is  manipin  ited  hy  ai'lilicialjy  interferiiiL;-  with 


HI 


biddi 


ii<y  and   on'ei'iijn'.      'I'lie  manipulator   who  de 


1;5S 


MONKV    AM)  HANKING 


sii'ts  to  buy  or  st'll  t'itlicr  (Impresses  or  raises  the  inai'kt,t 
(luotalioiis  by  jjinrhascs  and  sales,  tlic  ohjccl  hciii^i;'  to 
inspire  similar  l)uyin^'  or  sclliny-  on  tlie  part  ol'  peopji' 
who  see  priees  ^'oin<4  up  or  down  and  wish  to  partiei- 
|)ate  in  the  advance  or  decline,  as  the  case  may  he. 

'I'he  mani])ulalor  is  able  to  advance  i)rices  by  pur- 
cliascs  hut  if  he  is  unable  to  sell  out  het'ore  the  price 
has  declined  to  its  previous  le\  el  he  makes  nothing  by 
the  ti'ansaclion.  'I'he  manipulator  always  expects  that 
his  selling  w  ill  ha\"c  a  less  effect  on  j)riccs  than  the  buy- 
ing.    Othei'wise  he  gains  nothing  in  the  transaction. 

17-.  I'drhhis  of  fofi'i::,!!  iwcIkui^c. — There  are  four 
diffeicnt  varieties  of  stei'ling  exchange  ([uoted  above. 
Cables  we  have  already  described  as  transfci's  of  credit 
which  taki'  plact'  within  an  liour  or  two. 

Dtalci's  who  lia\e  sold  time  drafts  on  London  without 
ha\ing  (h'posited  ci'cdits  there  sometimes  postpone  the 
foi-warding  of  funds  until  the  drafts  ha\c  reached 
maturity.  They  do  this  hojjing  perhaps  that  the  market 
V. ''1  decline  befoic  the  maturity  date  and  thus  enable 
them  to  purchase  exchangi'  at  a  greater  pi'otit.  IIa\  ing 
waited  so  long  without  pui'chasing  demand  sterling  they 
are  obliged  to  go  into  the  market  for  cables  at  the  last 
moment.  It  will  l)i'  noticed  that  the  price  of  cablis  is 
twenty  points  abo\c  the  price  i){'  demand  stei'ling.  This 
dilfereiicc  represents  the  cost  ol'  cable  me^sagis  and 
also  the  inteitsl  for  six  or  se\en  days.  Tf"  (Kalei*  who 
sells  a  demand  draft  knows  that  the  funds  cannot  be 
called  for  in  London  until  the  draft  has  reached  that 
city  b\-  mail,  wjiieh  at  th<'  very  i»cst  must  r(i|iiirc  at  Icjist 
six  days.  Li  the  UKantime  his  London  account  is  draw- 
ing interest. 

17'{.  hchunid  stcriiui!;.  I)emand  sterling  repre- 
sents a  draft   which  is  payable  on  |)risentation  and  dc- 


■13^  , 


DO.MKSTK     AM)   l-()in'.I(,\    1  .X(  I F  AN(,i: 


llJi) 


niiiid.      It  \\ill   be  noted   tliat   there   is  a  difrereiiee  ol' 

!i\(   |)()ints  between  tbe  (juotations  at  <)|)eniiijLi'  'i'i<l  elos- 

ml;.      This  (hirereiiee  is  aeecMinted  for  by  [\\c  (hfferenee 

I,   ijiiahty   oi'    the    (h'al'ts    in    the    mattei-   ol'    sienrity. 

Drafts  (h"a\\n  l)y  the  best  known  and  most  rchable  in- 

-   Iiitions  eoniniand  a  sh-^htly  hiyher  pi'iet'  than  those 

^^:n■d  by  weaker  fii'Mis.      Hank  (h'al'ts  eonmiand  hinhcr 

|iii(e  than  coniinereial  (h'al'ts  ueeonijjanied  by  bi'ls  oi' 

lading-  and  other  doennients.     'I'lie  })riee  of  the  nini  ty 

(lay   (h'at'ts   is   nearly   2   cents   j)er  ))onnd   sterhn^n'   kss 

tlian  I'or  demand  drafts.      This  (hU'erenee  is  aeeounted 

Ini-  by  the  fact  that  the  jjurehaser  of  the  (h'aft  ninst  wail 

ninety   (hiys   before   lie  can   demand    ])a\nient.      'I'he   2 

1  riits  represents  the  interest  j'or  the  ninety  days. 

A  j)oint  mnst  be  noted  here  that  is  ot'  ^reat  import- 
anee  in  undei'standino'  the  nse  of  finance  bills.  The  rate 
if  interest  which  is  to  be  subtracted  from  the  (luotation 
luf  demand  sterlinn^-  in  order  to  oet  the  ecjnivaleiit  foi- 
iMiiety  days  dral'ts  is  reckoned  at  the  Kni^lish  cnrnnt 
I  lie  of  interest,  e\  en  if  the  ({notations  are  ^ivcn  out  in 
\<  '  \'()rk.  The  reason  for  this  is  that  the  purchasers 
III  the  bills  may  send  them  at  once  to  London  and  redis- 
I  lint  them  tiiei-e  at  current  rates  of  interest  and  if  they 
liiiosr  to  realizi'  on  the  funds  may  sell  drmand  sh  rbnn' 
i:  thi-  market  ])ricc.  e\en  before  Ihey  forward  the  nimt\ 
i..\  l)ills. 

ITk  l'!itnlis]i     hdiili'niL:     r//,s7o///,v.- There    exists     in 
lji<.iian(l  a  class  of  bankers  called   bill   brokers  whose 

letion  it   is  to  discount   time  drafts   for  pirsnns  who 
i  -ire  to  realize    funds  immediati 'y  and  who  arc    wiUiny 
I  '  pay  a  consideration  to  a\()i(l   waiting'  until   tlu'  ma- 
in litv  of  drafts.     So  uni\  ersal  is  the  iiistum  in  Isnuland 
't   drawing'  di-nfts   for  accounts  payable  thai    the   rate 
i  I   discount  is  more  important   than  tlu'  late  of  liianinii 


..,j^ijpipi 


1  ii» 


\i()\r.\    \\i)  irwKiNi; 


lllinls.         Must      l-'jl^lisli    IjIIMIHns    IIKII    i|i|\C    IK)    (lilL'l't     |(- 

l.'ilioii^  Willi  h.iiiks  liiit  (Ic.'il  tlnoiioli  i|k's,c'  hiil  hrokd. 
in  imu'li  Ihr  saiiii-  way  llial  in  Icojil  iiiatlcrs  Kiinlj,!, 
jKopIc  (leal  directly  with  a  sdlicii,,)-.  who  .•(.|),.^.scl|t^  a 
harnsttr.  who  is  the  otie  who  appears  in  eonit  and 
aeliially  handles  the  ease.  Th.-  rate  at  whieh  the  l(,iiu 
hills  ean  he  discounted  in  London  dei)ends  vei-y  eloseh 
iiixin  theotliciai  rate  at  the  Hank  oi'  Hnnlaiuh 

Wry  few-  of  the  hill  hrokers  ixpect  to  hold  the  hills 
until  maturity,  hut  they  expect  to  rediscount  thi'in  at 
one  ol'  the  lnr;j;v  hanks:  their  profit  liis  in  the  dill'erenc 
hi'tween  the  diseonnt  which  they  -et  from  the  eiistoitn- 
and  that  they  Jia\c  to  pa\-  the  i)ank.  The  laro'c  sfocL 
hanks  of  London  are  under  normal  c:i-emiistanees  will- 
in<4'  to  discount  hills  at  about  i  ._,  per  cent  less  than  the 
15:nik  of  Knoland.  Tiierefore  the  ojlieial  hank  rate  i^ 
neai-ly  always  hi,i;iier  than  the  actual  I'ate. 

'I'he  otlicial  I'ate  of  the  Hank  of  Lnolaiid  |,as  sueli  an 
important  ell'ict  upon  ci'edit  conditions  in  this  countn 
that  it  is  \\orth  while  to  understand  the  mechanism  iiy 
which  the  relation  is  kv\)[  so  close, 

17.").  FiiKinc-  hills.  Interest  rates  in  tjie  two  coun- 
tries are  e(|uali/ed  hy  means  of  linance  hills.  A  tinaiur 
hill  is  a  draft  drawn  hy  a  hanker  in  this  country  ii|)oii  a 
foreio-n  hank  for  tlie  i)ur|)ose  of  ivalizino'  funds  jieiv 
for  the  time  heino'  and  with  the  inttntioii  of  tiiectin^; 
the  draft  .'t  maturity  hy  the  purchase  of  demand  stcr- 
li'ii^'  *>!■  cahies.  It  is  simply  a  iiieihnd  hy  which  a  hanker 
liorrows  moil,  y  in  a  cheap  market  and  Joans  it  in  a  dear 
one.     A  concrete  case  will  make  the  suhjirt  clear. 

Suppose  th(    actual  rate  of  (liseoniit  in   London  is  J 
per  cent  and  that  tin    rate  in  this  eoiiiitry  i.s  fl  per  ecnt 
nker  is  .ihit   to  i»oi-row  funds  in  Knyjand  and  re- 


I  I    a  na 


loan  Ihrm  in  this  country  lie  will  lie  ah|c  to  ni.ake  a  proti 


DO.Mr.STK     WD   lOKl-.K.N    i;X(  HANC.l 


IH 


I  per  eciit  |)t  r  aiiiiuin.  K  ss  the  expnisi'  ol'  ■loiiin;'  hiisi- 
'■.  ,\  iKtiik'.r  (ksiriiiL;'  to  ciiua^f  in  this  t  raiisaelion 
t  oljhu'cd  to  actually  hoiTow  the  i'mids  in  lMi<.',ian(l 
s1p|)  the  Ljold  to  this  conntry.  He  ean  aeeoniphsh 
■  ■-anu'  j)ni'|)osc  with  less  expense  and  loss  ol'  lime  hy 
Jiawin^y-  a  ninity  day  di'at't  a^^ainst  a  London  hank  and 
M  Ihny-  it  in  the  loi-eiLiii  exelianye  maiket  and  loaning- 
:!i'  pi'oeeitis  at  the  jtrex  ailing'  rale.  The  pi'iee  he  will 
!i  :ih/e  for  the  ninety  day  draft  will  he  the  price  of  (le- 
liiand  drafts  less  a  disconnt  e(|nivalent  to  the  London 
!  it  ■.  as  we  ha\e  explained  aliove  in  connection  with  the 
ij.iMtations  on  ninety  day  di'afts. 

li  is  not  necessary  that  the  hanker  have  a  deposit 
i!((lit  ahroa(h  nn<Kr  the  coiuhtions  mentioned  it  wonid 
!'  \xi-y  nnpi-olit;.hle  for  him  to  haxc  a  deposit  \\  hen  he 
luiojit  loan  funds  to  such  advantage  in  his  own  conntry. 
fhis  lack  of  deposil  credit  does  not  deter  him  from 
liiwiiiy-  di'afU  npon  the  London  l)ank  if  he  can  make 
-'iiie  arrangements  with  the  hank  for  acceptinn-  the 
ii;aft  so  pi'esented- in  order  to  ,L:i\e  it  ne^otiahility  with 
the  hill  hrokei-s.  Al  the  expiiation  of  the  ninety  davs, 
liiiwcxcr.  he  is  ol)li<^ed  to  have  Hie  fnnds  in  the  London 
I'iiik  to  meet  the  draft.  These  fnnds  he  |)rovides  hy 
;':iiehasin;4'  demand  st(  rlinu  a  week  oi-  so  hefore  matur- 
ity in  order  to  yive  the  drai't  plenty  of  time  to  reach 
Knu-hiiul  bet'ore  the  draft  is  ])resentrd;  or.  if  he  has 
\\aitcd  too  joiio-.  he  must  huy  a  cable. 

17(5.  rm/it  on  /litaiicc  />///.v.— The  .'uiiount  of  his  i)i-otit 
•  Irpeiuls  entirely  upon  the  ditrerence  between  the  ])ro- 
ireds  realized  Iroiii  the  sale  of  tiie  m'nety  day  dratt 
wWwh  are  near  the  face  of  the  draft,  as  the  discount 
rite  in  Knii'j.aiid  is  low- 1 .  iilns  the  irit'T^s!  !'.•■  Iijik  (!;!!r!f'd 
K  loaning  the  proeeeds.  and  tlii'  pi  ice  which  he  must 
pay  for  the  means  of  c(i\(  linu  IIk    draft  at  maturitv. 


if 

;   i 


1 J-2 


Mn.\i:v  AM)  HA\KI\(; 


Ml 
■CI  I 


plus    the    coiiiinissiDii    Tor    ;icTfi)taiur    payahir    ro    li^ 
Ejioiish  Hank,  and  [\\v  liritisli  (iovrrniucnt  lax  oi.  hiiK, 
Tlic  hanker  who  issnes  Hnancr  hills  is  i'owvi]  t(>  \h- 
coiiie  a  spec  ilator  in  sterling-  fxdian^ijc  hccansc  his  i)r(,(ii 
(lejKuds  upon  the  price  at  which  he  can  hiiy  demand  st. ;  - 
lin^'-  or  cables  eighty  to  ninety  days  after  the  date  ..t 
issue  of  the  finance  hills.      If  he  wishes  to  make  sure 
a  profit  and  shift  the  risk  to  others  who  are  more  N|)e 
latively  incline(    or  who  are  hetter  ahle  to  forecast 
conditions  of  the  suj)ply  and  demand  in  the  forei^-n  ex 
change  market  in  the  future  he  may  make  a  contract  at 
the  time  of  issuino'  the  finance  hills  for  demand  sterlinir 
ei^yhty  days  after  at  a  certain  fixed  price.     The  issuing 
of  finance  hills  has  the  same  effect  upon   the  markH 
value  of  foreign  exchange  as  l)ills  risin<«-  out  of  commer- 
cial transactions.     If  Ihey  are  issued  in  laroe  amounts  at 
any  one  time  they  depress  the  market,  hut  when  the  time 
of  maturity  of  these  hills  ai)i)roaches.  the  purchases  of 
(hniand  sterlino-  to  cover  stimulate  the  market  artifi- 
cially. 

I  f  the  condition  of  the  market  is  such  that  <ro\d  im- 
I'orts  are  imminent  the  issue  and  sale  of  finance  hills  is 
hkely  to  reduce  the  price  of  hills  just  enough  to  hrin<: 
ahout  the  import  of  i.ol(h  In  this  ease  the  final  resuft 
is  exactly  the  same  as  horrowino  money  ahroad  and 
shi))|)in,<.-  it  to  this  country  for  loanin<r  |)urj)oses. 

In  spite  of  this  very  cffecHve  method  of  e(|ua]iziii«,^ 
interest  rales  helween  dinVrent  countries  there  are  timi^ 
when  the  discrepancy  hetween  the  rates  is  verv  oTcat. 
This  is  accounted  for  hy  the  fact  that  unusual  mn.ii- 
tions  exist  in  one  country  or  the  otlu  r.  The  defects  in 
our  currency  system,  of  which  much  is  to  he  said  later, 
are  responsihie  for  nivat  variations  in  the  interest  rate  in 
Xew  Vork.     Jt  has  heen  said  hy  financiers  of  authoritv 


no.Ml.STK     AM)   lOHKKi.N    i;X(  IIAN(.E        1  i;i 


dial  \c\v  ^  >rk  can  never  liope  to  iRronic  the  fiiiaiicia! 
ruihT  of  the  world  or  c'oni])clc  with  L(;n(loii  in  thai 
rcspec-t  as  lon<>-  as  it  is  |)ossiI)lc  Cor  the  rate  on  eall  loans 
!n  exceed  100  per  cent,  or  so  lono'  ;,s  it  is  i)ossil)lc  for  a 
'iiidilion  to  arise  wlicre  a  preininni  is  |)ai(l  for  ciu'- 
i  Mcy.  TIk  profits  from  Hie  issue  of  finance  hills  and 
ii'iiii  otlier  intirnationai  financial  transactions  are  so 
Mi;all  when  .cl  oned  in  i)er  cent  that  the  variations  of 
"HI  Dion  market  destroy  the  delicate  ad.lustmcnt  hy 
iiKikino-  such  operatioris  too  specidative  and  risky. 

The  «rrcat  adxantaoe  which  J.ondon  possesses  over 
<  \  cy  other  fii  ancial  center  is  stahility.  Hankers  can 
:  u.-ys  depend  u\Hm  hciiio'  ahle  to  realize  funds  upon 
Nitisfactory  collateral  in  London  and  take  no  risk  of 
liavin-  their  transactions  absolutely  l^locked  hy  a  sud- 
den money  j)am'c. 

177.  Foreign  dcpartmcut  of  a  Ijanh-.~ln  recent  years 
there  has  been  a  nreat  increase  in  the    foreign  business 
nf  hanks  and  many  foreign  departments  have  In  en  cs- 
tahlished.     This  has  l)een  due  t.    tl  •    rajjjd  extension  of 
"iir  foreign  commerce  and  the  lar;.     numl)er  of  Amer- 
iiis  traveling  abroad,   giving  rise  t     a   demand    for 
I'anking  facilities  to  expedite  the  forwarding  of  funds 
Hid  the  collection  of  drafts.     C'omi)etition  between  the 
''.inks  has  raised  the  price  paid   for  commercial  drafts 
'iiawn  by  exporters,  at  the  same  time  it  has  lowered  the 
piice  of  drafts  and  banker's  checks  sold  to  importers. 
The  advantages  to  a  hank  arising  from  the  niainte- 
ince  of  fo!    ign   department   arc,  according  to  Mar- 
ma  ff:  ' 

1.  The  foreign  de|)artment  affords  facilities  to  the 
general  clientele  of  the  bank  to  trans;ict  all  its  li.'uiklrv.r 
''ii'^iness  with  the  bank,  thereby  avoiding  the  possibility 

Iilloniati.m.il    l',\rli;in;:r:    p.    It, 


if. 


0 


MOM.^     AM)   l{\Mxl\(; 

of  liisiii;;'  a  prolilahk-  ai'coiiiil  that  is  djxm  to  siifccssl'i;! 
.solicitat  ion  Iiy  a  coiiipclitor. 

•J.  S{i\(s  as  a  vaiiial)lc  aii\iliai-y  tludnuh  {\iv  medium 
ol'  a(l\(.rtisriiRiils  and  prrsoiial  iii\ita(ioii  to  alt"ac't  dt - 
])()silors. 

.'J.  C'oiiiiiiands  proiniiK'Uce  of  llir  name  of  the  l»;'nk 
ainon^'  .New  ^'ol•k  hankei-s.  by  whom  its  forrio-n  ^x- 
chan^c  is  |)niThase(l.  and  amono-  hanUiTs  throtiyhoiit  thu 
entire  woi-id.  with  \\hom  aeeonnts  are  kept,  and  hv 
mIiohi  (h'afts  a<>aiiisl  its  kttrrs  of  ereiht  are  nef^otiated. 

1.  r.'aetically  eoincrts  the  hank  into  an  inlei'iiational 
liankinii  institution,  thereby  \astly  ine!'easiii<»-  its  Held 
of  o])ei'ation.  by  phiein<jf  it  in  elose  touch  w  ith  the  lon^r- 
estal)lished  monetai-y  centers  of  the  world. 

.■3,  Affords  the  l)ank  an  opj)oi-tunity  of  placin<r  loans. 
at  i'emunerati\e  rates  ol'  intei'est.  in  jMn-o|)eaii  mone\- 
mai'kets  when  faxorable  conditions  j»i'e\  ail.  by  the  pur- 
chase ol'  bills  of  exchange  as  an  investment. 

»i.  Ad'oi-ds  tile  bank  an  o])portunity  of  borrowing'' 
funds  l»y  means  of  finance  bills  in  any  monetary  centei 
of  the  world. 

The  foreign  departuient  of  a  baid<  usually  transacts 
the  follow  in<4'  business: 

1.  Sells  letters  of  credit  to  travelers  and  commer- 
cial houses. 

•J.  .Sells  drafts  to  [)ersons  desiring'  to  send  money 
alii'oad. 

'J.  Hu\s  drafts  di'awii  bv  (XDoi'tei's  on  forei<>-n  cm- 
sig'uees. 

]}]  addition  to  these  transactions,  the  possession  of  a 
foreiuii  department  gives  the  large  international  banker 
a  chance  to  boi-row  money  abroad  to  loan  at  a  higiier  rate 
ol  interest  at  iiome  by  means  of  finance  bills,  or  to 
invest    funds   in   sterling    bills   of  exchange   and   thus 


DOMESTIC  A\D  l'()Ki;i(;.\   KXCilANi.i: 


1  i.) 


realize  a  lii^rlur  rate  of  interest  than  lie  eoulil  ^et  l.y 
Inaiiinnr  at  lioiiic,  or  to  en-aye  in  prolitable  arbitra<-"e 
tiansaetions. 

178.  Ti-dvclcr's  Ic tiers  of  credit. — So  many  Ameri- 
cans travel  abroad  in  tlitse  i.ays  that  there  is  a  larye 
(hniand  for  letters  of  credit.  It  is  so  nineh  more  con- 
Ncnient  for  peoplr  to  obtain  these  letters  from  banks 
uith  whom  they  have  an  aeeount  that  if  they  are  eom- 
pelled  to  nrtt  them  from  other  banks  they  are  likely  to 
transfer  their  aeeonnts  to  those  banks. 

Letters  of  credit  may  be  issued  in  three  ways: 

1.  The  |)nrehaser  buys  the  letter  outright  and  pays 
cash  for  it  at  onee.  The  banker  sells  it  to  him  at  the 
selling'-  price  oC  demand  exchange  for  that  day  phis  1 
per  cent  commission.  Tims  a  letter  for  £l,000  with 
demand  ster'inn-  sdlino-  at  .$1.8.5.30,  would  cost  $iS53 
jilus  $48.55  or  $41»().'}.55. 

2.  If  the  ap})lieant  is  a  depositor  enjoyino-  hi<,di 
credit,  the  bank  is  Millino-  to  issue  to  him  a  letter  with- 
out payment  until  the  customer  has  drawn  money  upon 
the  letter  and  the  drafts  ha\e  been  received  by  the  sell- 
h\fr  bank. 

a.  If  the  applicant  is  not  a  depositor  or  one  liaving 
sufHcient  credit,  the  bank  will  issue  a  letter  upon  the 
deposit  of  collateral  security  to  secure  the  amount. 

lender  the  last  two  methods,  the  customers  are  not 
.lebited  with  the  amounts  until  the  drafts  which  they 
have  sinrned  to  draw  out  the  money  abroad  have  been 
returned  to  the  bank.  These  drafts  are  ch;iryed  at  the 
ciu-rcnt  sellin<r  rate  of  sterlino-  exchan,<re  jllus  1  per 
cent  commission  ])lus  interest  on  the  amount  lor  thirty 
I  lays  while  the  draft  is  comin.o-  i'rom  Kn.Ldan.fl  and  while 
the  remittance  to  cover  same  is  li'oin"- 

A  bank  can  place  itself  in  position  to  sell  letters  of 

(■--\ll        IK 


in 


MO.NKV    AM)   HANK  INC. 

r 

credit  by  iiiakii);^'  jUTiiiiu'cuRiits  with  a  LuimIoi!  hanker 
wlio  lias  a  larni'  iniiiii)ir  ol'  cnrrcspoinkiits  over  tlir 
M()i-kl  to  vjs\\  (li'at'ls  (li-awii  by  \.\\v  Iiokki's  of  letters. 
A  s[)eciinen  eopy  of  the  letttr  with  the  signatures  of  tht 
i.iaiia^yer  of  the  department  's  sent  to  e\'ery  eorres[)()nd- 
ent  of  the  London  hanker. 

When  a  person  presents  a  lellir  of  credit  olftained 
from  a  Phikidciphia  l)ank  aikh'esscd  I,)  tht  London  City 
and  Midland  Hank  and  its  corrcsponck  nts  to  thc 
Dentsche  Hank  in  Herhn.  i'oi  insta'ice.  they  will  com- 
pare the  letter  with  the  specimen  on  tile,  then  they  will 
w.i'ic  out  a  draft  on  the  Londoi  City  and  Midland 
Jiaiik  which  tluy  will  ask  the  p'.sson  pi-escntin^'  to  si^n. 
If  the  person  has  asked  lor  I'lO,  they  will  .u'ixc  him  for 
the  draft  the  amount  in  mai'ks  \vliich  they  are  [)ayinL; 
for  sterlin^f  dral'ts  on  that  day.  If  the  ])iMce  of  sterl- 
ing drafts  is  M  '1().V.\  \n  v  I',  the  pei'son  is  intitled  to 
M  •1{)\:M)  for  the  !.10  draft  which  he  si^^iiid  and  which 
was  endorsed  on  the  letter  of  credit. 

The  reason  why  hanks  arc  always  so  willing  to  cash 
letti'rs  of  (.'redit  is  hccansc  of  the  yi-eat  demand  for 
sterlin^n"  exchan;4'e  eviryuhere.  \\'hen  the  hank  has 
hoiioht  a  draft  foi'  llO.  it  sends  it  to  London  for  cri'dil 
and  can  inmu  (liat<ly  sell  a  dra  t  for  110  a^^ains'  this 
er(  (lit. 

The  London  City  and  Midland,  when  it  recri\rs  flu' 
draft    fi'om   the   Di'utsche    Haid'..  credils   it    to   tlieii-  ac- 
count   and    charucs    it    against    the    I'hiladelphia    isank 
,   'I'he   IMiiladc  Ipliia   haid<  must    |)ro\ide    fmtd-      i    London 
hy  huyinti'  slerlmi^  (  xchan^e  at  honir. 

17'.>.    Coni/llt  /-('iftl    lillils    (if    iiidil.       Thes(      are    usi  d 

i>y  imporlc  rs  to  purchase  ^oods  ahro.id.  \\\  means  o! 
them  merchandise  c;m  Ik  purchased  in  any  part  of  flu 
glolii'  on  a  c;in1i   hasis.  although  act,i;il   |)ayinciil   ol'  tin 


^\ 


x_Ji 


^ 


tlu 


i)().Mi;sTi(   AM)  loiji.K.N  i;\(  ii.\,\(.i:       rn 

■   ^1  <>r  llic  n-,...,|s  iin|)(.rtf.|  uill  not  I,c  .Icnuuided  of  the 

i'portcrs.    I,y    \hc   hanker    fi-niislnno-   t|ir   credit,    until 

'.'Innly  ..f  rcs,Krtivc  .Irafts  drawn   l.y  the  exporters. 

\dvanee  onkrs  may  he  -iv,,,  hy  iniporters  with  expor- 

t'ls    lor   the    inanuraetiire   of    ooods,   aeeonh'i.o-   to   the 

s[KrdieMtion.s  and  reciuirenients  of  the  iinporters'u  ithoi.t 

IMvpayinent  of  tlie  vahie  of  the  -oods  onlered.  or  a  eash 

'!'  pnsit.  the  eo.nin.'reial  letter  nf  ere.ht   hein-  snllident 

■  liinty  in  thr  hands  of  the  exporters. 

I  i'c  (xpork  !s  are  henelited  heean.,'  thev  receive  cash 
'"'•  -''ll   iHereh;in(hse  ordered   nndrr  Ihe   letter  of  creiht 
'  "h'  date  of  th<'  shipment :  tl,al  is  to  say.  .h'afts  covcr- 
!'-;  the  cost  of  iiierchan(hse.  even  if  issued    for  a  spec- 
'"'  li'ne  after  siyht  can  he  conv.  rt(   !  into  cash  hv  dis- 
'■'-"iitiri-    such    (h-afts    with    their    joc.d    l,ank<>rs.  "    The 
l'My(  r  of  the  letter  of  cre.lit  sio„s  an  agreement  to  reim- 
'•i>iM'  the  hank   lor  the  drafts  drawn  under  the  letter  at 
-'"    '•""•'•<"t   ••.■'!<•  of  exchan-c  an<l  to  pav  a  commission 
"I   1  |H  !•  (vnt  ..n  drafts  at  sixiv  days  .->  si-ht.      The  fact 
"'■■'    "'>■   'I'-'fts   arc    drawn   at    sixty   days   ohviatev;    the 
n'ccss!ty.,i'rhar,o,n,-intuest.  fnrthe  London  hank  does 
-'!  I'.-iy  the  drafts  nu'd  sixty  days  after  the  -...ds  have 
i-"'  shipped  and  the   h.ank  n..ti(i,d   that  the  draft   has 
'"<n  made. 

When  the  f.nvioner  has  f',..  uno.ls  ready  for  shipment 
''  •''■•'^'^  ""■  '''••'t  ••"id  discounts  it  with  the  local 
'mker.  Ih.  l(tt<rof  eredit  n,akin,o  it  .ecure  and  worth 
'""■'■  "'■"1  •■'"  "nlinaiy  coniUK  ici.d  .ImCt.  'I'he  dis- 
""*'"^  ''-'"1^  'i"'<'-  Ii"l<^  !l  nnid  matinitv  or  sends  it 
'"  ''"'"'""  l"i-<l,s,.amt.      IMnrr  i|  is  due  IIm.  .\merican 

'ik  pro\  id(  s  lunds  m  London  to  cover  it. 

ISO.  /////////,;-•  f„mo>,  rnhnu^r  f,,r  invisi mnit .— 
""I'l">^"  til-'  ral.  r\-  interest  at  hom.'  is  serv  low  at 
"     '•'"'"     '""■    ''     '^    l''i^''    ahroad.      'I'he    u.t.  mat  ,o,,al 


M()N!,\    AM)   HANKlNCi 


h;iiik(.i-  fiiuls  that  ho  could  make  piotil  by  loaiiiii'^f  in  tlie 
lallrr  niarktt.  IK'  ran  do  this  wvy  easily  hy  pmvhas- 
iii'>-  ■'loll!''"  hills  and  holdinu'  tlicni  hiinstlf  insli/ad  of 
Miidin^-  thrni  ahroad  I'or  discount.  This  he  could  easily 
do  hy  dctachin<4'  the  /irsl  of  exchan^i'  (  I'orei^ii  hills 
are  always  made  out  in  tiii)licate )  and  instead  ol"  indo's- 
in<»'  it  for  discount,  would  write  aci-oss  the  lace:  "Vor 
acceptance  only.""  The  correspo'.d<nt  I)ank  receiving 
sann-  would  secure  Mceeptance  and  hold  it. 

At  the  ind  of  tin-  perio-l  for  which  the  hill  ran.  or 
at  anv  time  iKJ'ore.  if  the  holder  found  that  lie  needed 
the  fiiiuls,  the  holder  could  take  the  scvuml  of  e\- 
chaii^i'.  endorse  it  for  collection  and  send  it.  The  //V.v/ 
containing''  the  acceptance  and  the  .sccoud  containin<4'  the 
endorsement  would  to^'cther  constitsilc  a  complete  hill. 
The  I'orrespondcnt  would  collect  (or  discount  them  if 
the\  were  not  yet  duel  and  place  the  proceeds  to  the 
credit  of  tlie  si'iidin^'  hank. 

Suppose'  demand  stcrlinu-  win-  selling'  at  .^^kH,).  the 
l?aiik  i)f  Kn.yland  rate  was  <;  jur  cent  and  the  avera;;- 
iiank  rale  in  this  country  was  t-  per  cent.  In  this  case 
the  price  of  hills  woiild  Ik':  ' 

«>|i(ri  (lixdiint  liitc  in  ImijiImihI  .>e/;. 
•t(l    il;i\s'    iiilcrrsl    lit     ■»'   ,    nil    .i!l.K»=:.0(ir'. 
\\v\M\    Mill    .SI.Miii's       "  —  .(lO.'o 

(•..wmii   .iuii    1-H)',f  =.001.> 

.(MiOS 

Therit'oK'    the    priei'    of    niiuty-dav     hills    would    h. 

Suppose  the  hanker  piirehasid  ':i(».»M)0  of  iiiiietv-day 
hills  at  SI..7S;  the  <'ost  would  Ik  St7,H(U».  At  tiie  did 
of  the  nine'v  d;i\s  In  would  he  ahit  lo  sell  'JIO.OOO  ot' 
(1(  iiiand  sttrhnu.  say  at  i^J^.S.")  (if  the  price  had  not  llne- 

1  Miir'Tiitl.  "  liiltiiiMtioiuil   I'.Ncliimtfc."  |i.  \'X\. 


^A'A 


Do.Mr.s'ric  AM)  roKi'.Kix  i:xriiAN(;E      no 


til 


iKil'.d).  or  a  total  of  ><|.<S, .)()().  His  i)rolit  would  \)c 
IS..-)()()-  S4T.«()(J  or  ifTOO.  li'  lif  had  loaned  the  i^A7,- 
MIO  at  .*{  j)er  cent,  he  could  ha\ c  gained  in  interest  oidy 
>^.'{.)H..3().  The  net  j)rofit  on  the  exchange  would  tlure- 
Inre  he  S'.'Mi  ..">(). 

ISl.  (ii'nudu  (uid  French  exchange. — The  mone- 
tary unit  of  (k'rniany  is  the  mark  whieli  contains  one 
!iiMidred  j)l'ennin^s.  Measured  in  o()|d,  ii  is  c(|ui\a- 
imt  to  s. •_':{«;{();>  in  Tnited  States  money.  The  (juota- 
liiuis  f'oi-  exehanuc  in  marks.  ho\\e\ei-,  aie  (juoted,  not 
:i^  till'  ])ii(  (,  one  mark,  hut  as  the  priee  of  four  marks. 
l"o|-  example,  demand  stei'liny-  was  recently  <|uot(.'d  at 
~^.".>i-  7-1  •">  k'ss  l-M-2.  meaninii-  tjiat  di-afts  on  (iei'man 
lianks  W(  i-e  sold  at  S.<>1.  7- it;  hss  1 -.'{'J  for  eveiv  four 
marks.  "Le^s  l-.'}-J*"  nuans  that  ]-.'}•_'  pt  r  e(  iit  of 
>^.'.>t  7-1*'.  must  he  deducted  from  S.tt  I-  7-Ki  to  ^et  the 
trui'  (luotation.  Kxpressed  decimally  the  (juotation 
would  he  .i»t  .()()i:{  less  .()()().'}  or  ><.•.»  UO. 

In  foi-ei^ii  txelian<4es  the  expression  "\kv  mille"  is 
iil'ten  used.  One-half  ptr  mille  (written  ]-•_>  ()-()())  K, 
1"  !•  thousand  or  !-•_'()  per  cent.  It  is  a  more  convenient 
!(  rm  than  fractional  jierceiita^es. 

The  I'rench  monetary  unit  is  the  franc,  divided  into 
one  hundred  centimes.  Mcasiued  in  ^^old.  it  is  ((luiv- 
aliiit  to  S.l<fJ!»,")  iu  our  money.  The  (piotations  for 
I'rench  exchange  are  yivcn  exactly  opposite  the  1mi^- 
I'di  or  (ierman  tliat  is,  they  (piote  the  numher  of 
:iancs  which  one  dollar  will  purch.ase.  A  recent  (piota- 
'ioM  for  d(  inand  exchannc  oii  Paris  was  .kIC.  7-H  less 
I -.■{•-*.  This  nuans  that  .").!»;  7-H  less  1 -:{•_'  |h  rcetit  francs 
'   il   •><•  sold    ,or  SI.      II    \v;i!   |„.   ,,()t((|   that    the   lan.er 


!'■   li^MM-'-,    the    lower   tiie   «|uotations   and 


\  ice   MTsa; 


>.  I  .)    IS 


liiiil 


'■|-  I 


Tl 


piotation  th  ui  .").  h"' 


^1 


!<•  (piotations  vai'\    I -H  per  ceut  ,,;■  in  intervals  of  .'j-8 


M()M:\     AM)   H.WKINC; 

'•ciitiiiK'  (l)ecausi'  .5-S  (viitiiiir  is  api)n)ximatcly  1-8  j^i 
(viit  of.-,.!.-,  fraiK-s.  the  hasis  of  roinijutation  )  .*  Tlic  in 
tcrvals  hcnin  „i;||  .-,.|-,  .„„|   „.,,  ,|,,.^^|   ^^^^^^,      .^.    .^ 

3.1(;  1-4.  .).!(;  7-H,  .5.17  1-2.  .).!S  1-8.  .1.18  ;j-t.  etc..  'I'l,,. 
reason  for  tliis  is  \hv  fact  tli;.t  roriiKMlv  1-8  ikt  criit  ua^ 
dose  cnouol,  r,,,-  tlic  hrokrrs  and  was  a  coiivriiirnt  fioi,n 
in  nrhitrao-r  transactions,  licccntly  pricrs  aiv  (|not((l 
clo^^tr  and  the  ijnotations  air  rais(,|  and  louvivd  hv  dc- 
<l>K-tin,<.-  or  addin-'  l-lt;  per  crnt,  l-.TJ  per  cvnt  or"  l-(il 
[)(-'!•  cent. 

In  onUr  to  deal  witli  such  awkward  . (notations  it  is 
iKvessary  to  convtrt  tluni  into  dcrinials.  lor  it  is  iiii- 
possihlc  to  find.  r(«r  instaiKT.  .>  per  cent  on  .-,.]<;  7-8  1.  s^ 
I -•{•2.  To  (NMiNcrt  .>.1(;  7-8  k'ss  1 -.•{!>  into  a  (kvimak  n 
wonkl  first  fin(i  tlic  decimal  cinivaknt  of  .007-8 
.0087.):  then  wc  woidd  find  I -;}•_>  prr  cent  of  .l.n;  7-8 
-     .()Oi:,(i      -   .-,.!(;     .     .o,)H7.-,   ^.   .-,.1,187.-,.      To   tins   ^^r 

""'^'   ■' •<'<"•'•■•        •>.lT<>;n.      it  is  a.hk'd   hrcaust    "  ks. 

I-.'}-.'  per  cent  ■•  means  a  k.u  er  (piotation  :  smkv  Ife  liiu|,er 
tli«'  fi.ymes  are  the  iou(T  the  actual  .inot;ition  mnsrh,. 
Ilie  reason  for  ad(hnn  the  .krima!  instead  of  snhtraet- 
ili<4'  it  is  ekar. 

Toconvei't  a  (juotation  expressed  declnially  to  the  ren- 
idar  fractional  lorm  is  more  ditlicnil.  I ,.  t  Us  take,  for 
example.  .-).l!i'J."). 

The  ne\t  ,i(arest  (|nota!ion  fVae'.ionalK-  is  .-,.1!)  ;{-8 
(see  list  al)o\t)  or  .5.  l;»;{7-,.  which  is  too  laru,.  l,y  .oopj;,. 
.OOlL*.")  is  ((juixalenl  approximah  ly  to  !-;{•_>  p,.,"-  ,.,.,,1  ,,f 
.■).1!».  so  we  would  compkle  !he  (|notati.m  hs  redncm- 
the  .-,,I<i.'{7.-.  I.\  I -;{•_'  |„r  e.tit.  makinu  it  .-..IK  ;{-8  phi^ 
l-;{-J.  plu^  n  pr.  srnli:iL;  a  low.rlnn.  of  the  aetn.d  .piola- 
tion. 

To  find  the  vahie  of  a  00  ,ja\  hill  ,.ti  Paris  for  .52.', 
i  tallies     if     dem.and     exeliMiiMv     v^,,*'     ;it      VK;     7  8     k  s'^- 


DO.MKSTK      \M)   lOUKICN    i:X('HAN(iK         151 

l-.'}2  (."i.lTO.'JI  as  al)()\'cj  \\c  would  calculate  the  discount 
and  ex})eiises:  ' 

I'r.iiu's. 

C,   iimisM.m  1   10':   or  W'::    (';=rF.!i   MH.l.F.) 1:5 

liduli  Kill  Sl.iiiip  !-,'()';  or  I-i?i)-00 .'(i 

j)i^c()uiit  (III  (Li_\  ■,  ,it  .'■,'; ;j.6u 

I'lMiu-.        :i. !)!>() 

I'rirf  i)f   ilciil.'iiul    .•\cli;illf;'i'    jlT.fCil 

Pri..        r    !li)Ml;iy    .-.chaiVL'c 5-M.031 

(^UotilllOIl    |ll  T    Sl.lMI    Ulirlll      m'    CNcilimLif ."j.-l 

.'{.".)!>  IVaiK's  are  added  to  the  pi'iee  of  demand  hecause 
:•()  da\'  exehany'e  is  \v(iftli  less  than  demand  and  the 
Idwc!'  he  uotatioiN  Hie  i^reater  the  numher  of  iVancs 
:i\r!i    i'or  SI. 

\>1.  ArhilraiiC.^  'V\w  ai'hitra^e  transaction  consists 
ill  1mi\  iiiLi'  or  selling-  i'\ehan<4'e  on  a  cei'tain  center  indi- 
ixetly  Ihrouyh  a  third  eit\-.  For  example,  a  hanker 
wishini''  to  increase  his  London  halanet  would  huv  Her- 
iiii  exehaii^f  and  instruct  his  (ierman  coiM-espondent  to 
use  the  proceeds  ot'  the  hill  in  purchasing"  sterlin<i'  in 
I'm  I'iin.  thus  iiici-easin<4'  his  London  halance  l)y  the  tri- 
aii<;nlar  opiiation. 

Suppose'  a  ha'  Uei*  had  an  opi)ortunity  to  sell  a  draft 
nil  r  I'is  hut  ha(.  no  funds  tluiT.  It  would  he  very 
'  as\-  foi  him  to  sell  the  di'aft.  purchase  with  the  j)ro- 
(■(  rds  ^t(  rlinn'  exchan^^e.  I'cmit  it  to  London  with  in- 
truetions  to  purchase  Lai'is  «  \chaniit  in  London  v  th 
llic  ]>roeeeds  and  forward  fm'  eredil  to  the  Paris  cori'c- 
piMMkiit  to  co\  (.  r  tin   draft  sold  ;d  lir^t. 

Supjjose  tli<'  (juotatioiis  Inr  IIk'  day  were  as  follov.s: 

Sliiliii^:  cMJiMMpr  in   N(\\    >'ii?k  s    (>| 

I'jirls  ('\clianfrr   in    \>\\    ^  nrk  j.l7'_. 

I'riincs  it)   I.iiiiilnii Jj..'5  per   t' 

'  M.ir;.MMlV,  "  Iiiii  nrili-'Tij   1-' v..  h-mL'"-.'"  p.   11.'. 


T 


I"'--'  .M(t^!:^   and  i5.\\kin(; 

If  Ik'  sold  ;i  (li'al'l  Cor  •_'.").•_'.■)()  (Vaiics.  lie  would  rccc'i\c 
thn-dVotii  SKH7i>.'_';}  (•_'.-).•_',>()  duidcd  l,y  .).17.-)).  To 
cover  this  draff  in  Paris  hy  l-'rcm-li  excliau.yv  piirdmstd 
in  London,  it  would  he  ncccssai'v  for  liini  to  hnv  sterling' 
cxclianuv  at  XLHL  If  •_'.-,.•_>:,  francs  in  London  sold 
I'or  f  he  would  he  i'e(|uired  to  huy  £' I. ()()()  in  ordei 
to  oet  -i.-j/J.^O  francs.  This  would  cost  him  in  New 
^'ork  at  s;.Hk  st.siO.      His  profit  would  he: 

Prncifils     ^1,^7!)  _);{ 

t'"-l    1,^1(1 

His  London  hanker  would  ])rohahly  ehar^'e  him  1-40 
per  cent  foi'  doiii^  the  husiness.  which  woidd  cut  down 
his  profit  hy  S].-J].  lea\  in;^'  it  net  at  ahout  s.'W.OO. 

The  (|uotations  in  \ew  VovU  foi'  continental  cx- 
clian^i'  arc'  inlhuneed  lai'^cly  hy  the  price  of  sterlin«4' 
exchange,  hotli  in  \ew  ^'ork  and  iti  Hi'rlin  or  I'aris. 
If  from  anv  cause  the  prici'  of  I'onlineiital  exciiaiii'e  in 
X(\\  ^'ork  should  tend  to  fall  to  a  point  where  tliei'c 
would  he  a  profit  in  the  arhit  i-aye  transaction,  the  de- 
inand  for  it  on  the  part  of  the  hankers  who  wish  to 
"I'li^c  a  profit  from  arhit ra^in,t>'  would  immcdialclv 
force  up  the  j)riee  a^ain.  Therefoi'e.  there  is  a  certain 
relation  existing'  hetween  all  the  iiuotations  of  foreio'ii 
exe!ian<4c.  When  tin  re  is  iKithei  profit  noi-  loss  from 
aihitrauinu-.  they  are  said  to  In    at  |)ar. 

l'"or  instance,  if  d(  niaiid  st'ihn^'  in  Xew  York  were 
at  s  J,.S(i!;.">.  the  //////  pnr.  and  in  Hei'lin  a!  -JOA'A.  also  the 
//////  /nir.  the  comiiieicial  |)ar  of  marks  in  Xew  ^'ork 
could  he  found  ]>y  dl\  idin-.^'  4. HOC..')  hy  '20.V.i,  c(iuals 
.'-'.'{iSl',  the  \,ilue  (if  (iii(  maik  (  xchanL;e  in  Xew  \'oik; 
midtiply  it  h\  four  ( .•_';{,S-i\  i  .l).j;}2)  and  we  hive  flic 
commei'cial  par  of  excliari«ie  for  mai-j.  <  \eh;uii,c  which 
is  also  the  iuint   par. 


CITAT^TKK  X 

HLMHTALLISM 

1H;{.  World's  stock  of  (/ol(L—Thc  total  amount  of 
;:'(il(l  estimated  to  have  been  ])ro(luce(l  in  the  world  up 
til  the  year  1911  was  !f^U,()0(),()()(),()()().  The  amount  of 
;^(i|(l  ill  use  in  1910  tlirouohout  the  world  as  money  was 
si;.."i()(),()()().()0():  thus  leaving-  over  .$T,()t)(),()0(),0()()  to  he 
:i(counted  for.  Of  this  amount  it  is  ealeulated  that  over 
three  hillions  have  been  consumed  In  the  arts,  and  Jit'tv 
iiiilhons  have  been  lost  through  the  abrasion  of  coins; 
and  that  $2,00(M)()().()00  has  been  exjiorted  to  the  Asiatic 
(nuntries,  where  it  has  been  hoarded  and  j)asse(l  out 
mI  monetary  use.  This  leaves  unaccounted  for  over 
S'-'.OOO.OOO.OOO,  which  probably  rei)resents  the  -old  that 
las  been  Inst  in  transporting-  it  across  the  sea.  or  has 
ti(  ( n  hidden  away  in  the  earth,  or  is  at  present  in  hoards 
(if  which  no  record  is  kept. 

IH^.  Ilistor//  ()*'  till'  pit  clous  mctah. — Accorditio-  to 
t!ir  fiu'ui-es  of  the  production  of  sil\er  throughout  his- 
!  ric  times  it  is  estimated  that  up  to  li)l()  there  had  been 
liroduced  $1.*{.77."),<)<M).()()().  which  was  accounted  for  in 
|iirt  as  follows:  Consumed  in  the  arts,  .*i<i.7.-,().0()(),()(M); 
iliAotcd  to  monetary  uses,  over  $4., ()()(),()()(). ()()():  e\- 
|| .rtid  to  I?ulia  and  China,  ov.'r  J^'i.OOO. ()()(),()()().  This 
l'a\cs  unaccounted  for  the  sum  of  the  nillions. 

In  ancier.t  times  tiier''  was  considerable  pi-oduction  of 
Mil  pi-ecious  metals,  mostly  trom  'he  mines  of  sdutiuin 
l.uropc.  These  sources  uerc  worked  by  sla\(  lalxtr  al- 
'  Hist  exclusively,  and  the  j)?'<»durtl   ns  found  their  uay 

15LJ 


\\' 


i 


154 


MONKS     AM)   HANKlNi. 


into  L>r(  at  lioanls  wliicli  strxcd  no  xalualilc  piii'jxisc'  otln 
than  to  |)i'o\  i(K'  a  \  isihlc  (,'\  idincf  of  tlic  wtaltli  and 
powci-  oi'  till  i)\\  iit'i".  ( )nly  a  small  |)aii  of  tlir  cxistini; 
stock  (d'  precious  uk  tals  \\  as  used  as  a  circulating'  iiu- 
(liuiii.  and  of  course  at  that  time  its  use  as  a  liasis  dt 
ci'cdit  was  entirely  unknown. 

(iolil  and  ^lUir  wtvv  rrti'iirdtd  a-^  an  cud.  not  a-  a  means;  a^ 
t  I'ca^n  ic,  not  iiinm  \.  'rii('\-  wri'c  di^t  rilait  id,  not  l(\  Iradc,  l)ul 
l)\  war.  It  wa.s  tlK  hand  nC  the  (■(iiuiuiini'  tliat  stri|)i)cd  tin' 
iVoni  [lalaecs  and  tiiii|ilr>.  If  \\v\  \Mif  takni  t'l'cnn  tlu  -.toi'c 
dt'  nHinarclis,  il  wa>  imt  to  tVrip^lit  tlir  ca  a\an>  nt'  ronnnirci. 
Ijiit  ti)  till  the  cliarii't-  and  nnilr  earl--,  t(i  load  tlir  sinn})tt  r  lior-r- 
()i-  the  cainfl  trains  of  a  \irt(iri(iu-  army.' 

At'ti'i-  thi'  fall  (d'  the  Honian  l\mpiic  the  mines  fell 
into  the  hands  of  the  harharians  in  their  southern  mi<i'i'a- 
tions  and  ceased  to  he  worked.  1"  rom  that  time  on 
urdil  the  disco\cry  of  America  the  (|uantity  of  precious 
metals  in  l-iUrope  (lecreased  ratiic!'  than  increased. 
Lai\y'c  (|uantities  wcic  used  in  dccoi-atin^'  the  chui'clies. 
There  was  prohahly  e\-en  less  used  for  nion(dary  pui- 
|)oses  than  the  limited  an  id  wiiii-h  had  heen  so  used 
in  the  ancient  times. 

IH.).  Tin-  Feudal  I'lriod.  I'nder  the  feudal  systiiii 
society  \\as  ornaid/ed  on  a  hasis  which  re(|inre(l  V(r\ 
litth'  ^■\cllan^e  >d'  products,  ami  most  id'  such  (.'xchan^i 
as  ixisttd  was  doni'  on  a  li.irtc  r  hasis.  Taxes  and  i)ay- 
ments  to  the  lord  ol'  the  manoi-  wx'rc  madi'  in  ])ro(lucc. 
The  i'o\al  eourl  was  niaudain(d  rmt  I'rom  monev  taxes 
collected,  hut  from  tlu  pi-oduce  of  th(  ci'ow  n  huKK 
wliicli  the  kini;'  rec-ei\cd  as  the-  lord  of  the  manor.  W'ai's 
were  condu(dcd  withmd  the  use  of  mout  _\  ;  the  sol- 
di*      were  e(|uipp((l  from  iheir  own  resources  antl  svcrc 

'  y    A.  W'.lki  r,  ••  M(.ii.\,"  p.   las. 


HiMr;i".\i.!.is.M 


■)i> 


ii^t;iiiK(l    Ciom   tli(    I'oraoL'  ol'  the  counli'x-  ti';i\  crsrd    in 


(  ailll);lli•ll^. 


IH().  Discover!  I  of  A  iturica.  One  ol'  liic  most  iiiipoi'- 
!  iit  flfects  'if  liic  (lisco\ri'y  of  Aiiirrica  on  I^'iii-opcaii 
idiioinic  coiuJitions  aro.st-  IVoiii  tin-  (juantitiis  ol'  .sihir 
which  hrniui  to  Mow  in  an  incrt'asino-  stirain  IVoni  the 
Spanish  colonics  to  S|)ain  and  (Voni  Ihcncc  to  he  dis- 
liiiiscd  throuii'hont  Kni'()])c.  TIic  ca^cr  (picst  of  tlic 
lai'ly  explorers  for  the  precious  metals  can  he  hettei- 
understood  when  we  know  that  the  value  of  silver  was 
Many  tinu's  its  value  to-day.  and  that  the  precious  metals 
\u  re  al)out  the  only  pi-opeity  which  could  he  jjrofitahly 
transported  dui-inii'  these  limes  when  transportation 
".as  so  dillicnlt  and  e\])ensi\e. 

I. ST.  ElJ'irl  of  silver  from  A  in  cried.-  The  effect  of 
'lie  .\mei-ican  siher  upon  the  economic  conditions  of 
l'",uro])e  was  revolutionai'y.  Payments  fi-om  the  tenants 
I"  the  landlords  for  the  use  of  the  soil  had  heen  made 
I  ither  in  |)roduce  oi-  in  lahoi-.  a  sxstem  which  I'educed 
llie  tenant  to  a  condition  not  far  remo\ cd  fi'om  that  of 
the  slaxf.  (Ommerce  was  so  limited  that  eveiv  com- 
''I'liiily  had  to  he  practically  sell'-suppoi'tin<^\  and  its 
rnnsumj)tion  wa.s  limited  lo  t!ie  articles  which  could  he 
produced  in  tiie  immediate  vicinity.  The  lack  of  com- 
nicrct'  made  it  |)ossil)le  for  famine  to  exist  in  one  county 
AJiile  wrcat  plenty  existed  in  the  iieiu-hhorinL)-  eountv. 

The   transmission    from    payment   in   kind   to   money 
pavinent.   which   soon    |)i'ofoundly   altered   the   relatiotrs 
"(iwfcn  the  loi'ds  and  tenants,  makinti'  the  latter  much 
"lore  indep(  iid(  111.  was  not  so  much  due  to  the  greater 
'Mindanceof  money  as  it  was  to  the  effect  produced  l)y 
'h    new   silver  on  prices  of  ail  C!»mmodit ies.     The  Span- 
nils  to  whom  this  new  siher  tirst  came,  appeared    in 
ihe   mai-kets   of    Kuropr   .  ^    jMirchasers   of    -ouds,   thus 


1    ■  :  ■ 


}r,c, 


^I()^■!:^•  and  h.\\ki\(; 


\l 


»'i(;ilitin-  a  steady  (Iciiiand  lor  export.  TIic  rise  of 
prices  and  tlic  skady  market  uavc  a  stinmliis  to  indus- 
try. Orinii.ally  money  had  I.een  nse<l  eliiellv  as  a  store 
"f  yahu-  and  iiad  heen  hoarded  u,,  as  a  proteetioti 
anainst  inisrorliuie.  This  was  justified  from  the  eon- 
•litionsor  llie  ti.Mie  uhieh  made  it  (htlieidt  to"  aeeumuhite 
any  other  form  oC  property.  The  huid  A\as  not  houyht 
and  sohl  as  to-day.  hut  was  n.nsidered  permanent^!,, 
the  possession  of  famihes  who  held  it  under  various 
i"rms  of  hmited  title  from  tl:e  isini-- or  lord. 

There  was  very  little  opportunity  to  ae,|uire  im.due- 
tive  eapital.  What  little  invested  eapital  there  was 
'"  ""■  *'•"'•"  "'■  '''»"•  mills,  etc..  was  held  l.v  the  lords 
under  the  same  eonditions  as  the  land  praetieallv 
Money  was  therefore  ahouf  the  only  form  .,f  propertv 
m  whieh  saviiu^s  eonld  he  invested.  TJu.re  was 
ineentive  to  eireulate  money  e.xeept  when  misfm-t..,. 
(oreed  the  possessor  to  release  it  for  the  neeessities  o 
Jilt,  or  when  it  was  extorted  hy  foree. 

1S8.  //////r/.////.v//u/,////r<7.^  Himetallism  is  a  monetarv 
system  un.Ier  whieh  the  Government  permits  anvhodv  t"o 
l>rm-  uoh!  or  silver  to  the  mints  and  have  it  eoined  into 
money  winch  shall  he  le-al  tender  for  all  purposes.  Hy 
thus   perniittino-   the  eoirta-e  „f  m.-tals  without  restrie- 

tion,  the  relation  hetween  the  values  of  ,  oins  an.I  hnllion 
IS  automatieally  re-ulat..,!.  A  demand  for  monev  will 
tdi.I  to  M.erease  its  value  eonipand  to  h.dlion;  ov,  as  it 
Jil'P<ars  to  the  puhlie.  the  priee  of  hullion  falls  sh-ditly. 
Kven  a  very  small  <Ieeline  uouhl  he  sutlieient  to  hidu'v 
someone  to  eonvert  hullion  into  eoins  throu^l,  the  mint 
and  thus  re-estal.lisi,  the  e.|mlil)rimn.  Prior  to  IHK; 
ni.-t  eivilized  nations  were  <.n  a  himetallie  hasis.  admif- 
tii!-  to  their  mints  both  metals.  !„  the  Tnlled  States 
tl.e  lirst  coinanc  hiws  esla])lishe(l  a  douhle  standard;  the 


lo 
une 


IUMi;iAI,I.IS.M 


1.57 


dollar  w.is  In  lir  t'(>i!i|)n:-,cil  of  either  JJTl.-.J  ^vain.s  ol' 
s;l\cr  Ol'  "J  l-.7'>  ^^fair.s  of  pure  n'old.  the  I'alio  as  to  weight 
li(  iiiL^'  lirtc'fii  to  oil''.  Ill  l!s;U  llic  ratio  was  made  six- 
tr(  II  to  oiR',  tin-  aiijuiint  ol'  pure  "^old  in  the  eagle  Ijeiiig 
!V(hieed  to  '2''i.'2  grains. 

1S'.>,  l)i/fiinliii.s  ,'//'  hiincldlii.sm. — In  tlie  study  ol'  the 
standards  in  a  pre\  ions  eha])tci'  it  has  been  seen  how 
llic  (htVereiK'e  in  mint  ratios  between  the  diU'erent  'i'o\  - 
(inments  created  a  (■on(htion  which  mack'  it  ini))ossible 
to  keep  gold  and  .siher  coins  in  cii'cnlalion  eoiu'urrenlly. 
Ill  I'act  there  has  been  no  lime  since  :lie  founding  of  the 
;:o\trnmenl  ol"  the  I'nited  Stales  that  il  could  ha\c  been 
said  that  the  counti'v  \\as  actually  u|)on  a  double  stand- 
ard. The  ti'uth  is  tjiat  the  I'nited  States  was  lirst  upon 
a  siher  standard;  then  from  IS.'U  to  1H(>'.?  it  was  upon 
a  gold  standard:  then  from  ISd'J  to  the  ixsumplion  of 
specie  payments  in  1S7'.>  it  was  u])()n  a  |)aper  money 
standard;  from  1H73  to  1S7'.»  it  \\as  nominally  upon  a 
single  gold  standard,  and  after  the  latter  date  actiially 
upon  a  gold  standaivl. 

In  ISK)  the  I'liitid  Kinmlom  a(loi)ted  a  siuii'le  <>(>ld 
standard.  It  was  the  fii'st  country  to  do  so.  The  other 
countries  of  Kui'o])e  and  the  ( 'nitt;!  .Statt's  continued 
nominally  upon  a  gold  standard  until  the  seventies. 

Hefore  the  beginning  of  the  nineteenth  century  bimet- 
allism in  lMir()])e  was  practieal)le  because  trade  at  that 
time  had  not  been  dexclopcd  to  a  jx^int  where  the  dif- 
I'l  I'ent  ratios  in  the  diffd'cnt  connti'ies  produced  any 
a.jipreciable  llow  of  metals.  1 1  is  not  initil  \alnes  and 
prices  i'esi)ond  r(adil\  to  conditions  of  supply  and  i\v- 
maiid  and  until  Ibci'c  is  sullicicnt  commercial  intcrcojirse 
I'(  twceii  h)calities  to  c(|uali/.c  \alues  that  dilliculties  con- 
icrning  tbe  standard  arise.  Prior  to  the  ninctt'cntb 
(■(  ntiu'v  there  \Mre  so  man\-  intei'ferenct's  with  tjie  i.at- 


V 

I; 


1: 


1!fff 


I  i  il 


W 

II 

7/i 


MICROCOPY    RESOLUTION    TEST    CHART 

,ANSI  end  ISO  TEST  CHART  No    2 


1.0 

lii  128      II   2.5 

j^  ■»      11  = 

t^  lail         2.2 

::i^    - 

I:    .       2.0 

li                        

k.   ^ 

nil  1.8 

I.I 

1.25 

1.4 

; 

llll 

1.6 

^     /APPLIED  IIVMGE     Inc 


K         1 4609 
Phon» 


IjS 


-M('M;V    .\\I)    H.WKINf; 


iiral  play  of  supply  and  (lo.md  llial  the  values  were 
mostly  c'()ii\(.iiti()iial  lather  tiiau  coiiipft:; :  ;e. 

I!>0.   Advuutn^^i.s    of    hinula.'li.sm.      Xotwithstaiulin-- 
the  fact  that  practically  all  nations  except  the  I'nitcd 
Kino(l,,„,   were  on  a   hinictallic  basis  hcl'oix.-    1870,   the 
system  could  not  he  called  international  hinietallisn'i  he- 
cause   of  the  different   ratios  of  the   various   countries. 
Those  authorities  who  adv.K'ate  hiuietallisin  do  so  on  the 
^n-ound  that  ii  assures  a  more  stahle  standard  than  either 
metal  il   used  eNelusi\ily.      It  is  ar-ued  that   if  the  pro- 
ductI(Mi  of  eidier  nietal  should  diminish  co.npare.l  with 
the  other,    its   iK.tural    rise   of   value  wo.dd    prevent    its 
bemn-   taken    lo    the    mint    for   coinaoe:    the    monetary 
dc/nand  of  the  country   would   therefore   fall  upon   the 
other  iuetal  accordin-   i,,  Cvshanrs   law    (which  states 
that  cheaper  money  tends  to  drive. .nt  the  dearer).     The 
mcreased  .lemand   for  the  more  abundant   metal,  trans- 
'*■'■'■'■''  '"  it  '■'■'>m  the  scarcer  nu  tab  would  tend  to  restore 
tiu'  e(|uilibrium   be  tween   tlu-  two. 

I-'m-  in^iance.  if  under  the  conditions  just  mentioned 
It  had  b.vn  o,,|,|  i!,;,t  |,.„|  ^.,,,,,,„  scarcr  and  more  valu- 
'•'''*■•  ""<l<'-  I'imetallism  tlu  money  demand  would  have 
'"•'■"  tnuislern.l  t<.  silver  until  its  bullion  value  a-ain 
^^■■is  restored  I,,  ;u.  .•.,ualily  with  ^nld.  If  there  liad 
'"<"  ;•  Mt.ule  unid  standanl  und.  r  the  same  circum- 
stanc(s  tl,<.  increased  valu.'  of  o,,j,|  ,voul.l  have  resulted 
'"  •■'"  ••'I'|n<rl.-,!in-  sl,-u,<laid  an.l  a  consr.pu  ii!  f;dl  in 
pnces.  Tudrr  lb,  dnubl.  sl.ui.lar.l  'here  c.uild  b,  no 
rise  ,.f  Mvneral  prices  until  the  ,|iianlilv  nf  b,,tli  moU 
;"id  silv.r  ha<l  allrred  sullicientlv  b.  pmd.Hv  IbisivsuH. 

I'.'l.    77/,    sni^/r   shnn/ar,/.      Thr  .bllicult irs    inherent 
"  "'-    'l"-'l'l<'  sfMudanl  have  |,,1  to  lh<.  use  nf  bnth  metals 


<'"'""'   I'-'ly  '^u^\  i^iven  n.mpletc  le-al  Icn.ier  mialitv! 


""  >'•      *  n  iiu    jiiorie    IS 


BI.MKI'ALl.lS.M 


1.5') 


Silver  is  coined  in  limited  anionnts  only,  and  used  solely 
\'nr  the  minor  coins.  This  was  tirst  systematically  put 
III  practice  hy  the  I'nited  Kingdom  which,  as  has  heen 
said,  adopted  the  single  yold  standai'd  in  ISKl.  All  the 
(isili/.ed  nations  have  since  adopted  this  mode  ol'  usin^ 
the  two  metals  together,  to  the  accompaniment  of  a 
sinyle  ^'('Id  standard. 

in  the  Tnitcd  States  the  smallest  u'old  coin  that  can 
lir  com  eniiiitly  used  is  the  (inai'ter  ea<^!e  ( •'^•_'. .")()) .  which 
(■(irres])oniis  with  the  British  half  soxerei^n.  the  (xer- 
man  ten-mai'k  piece  and  the  French  ti\e-rranc  piece. 
Sihei"  is  therel'orr  used  for  the  smaller  transactions,  and 
i;Mi<i'es  in  si/r  from  the  ten-cent  ])iece  to  the  dollai-  piece. 
I'oi-  the  smaller  transactions  siher  has  not  l)ulk  enough, 
so  resoi't  is  had  to  coins  of  nickel  and  coj)|)er. 

If  silver  is  undervalued,  undi'r  the  douhle  standard, 
it  will  tend  to  disappiar  from  circulation.  'I'his  hap- 
pi  ned  in  the  I'nited  .States  undei-  the  system  adopted 
in  IS.'U  and  IH.'JT.  Sihir  was  (h'ixrn  out  of  circulation 
ii\-  n'old.  \\\A  aft:  r  the  discoxc^'y  nt'  n'old  in  lSl-'.>  in 
(alifoi'nia.  the  yellow  mrtal  was  poured  upon  the  mar- 
ket in  lai^e  amounts:  unld  eoinat^c  increast'd  while  the 
\ahie  of  the  metal  fell,  and  siher  disajipeared  from  cii'- 
eu!ati(in.  'I'his  led  to  the  act  of  1  S.").'{  whii'h  created  the 
suhsidiary  system  in  the  I'nited  State..  Half  dollars, 
i|uarters  arid  dimes  were  coined  of  such  short  weio-jit  in 
lint'  sil\(  r  that  no  one  \v;is  lemptid  to  (  \port  them  or 
to  nielt  them  for  commercial  pufposes.  The  half  dollar 
was  made  to  conl'iin  17-. H  trains  of  line  sihei'.  The 
-■il\cr  dollar,  tin  iVee  eoiuiiiic  of  w  hieli  ;it  tli;it  lime  was 
authorized,  contained,  as  it  doi's  to-day.  '{71.-">  urains  of 
pure  siher.  The  suhsidiarv  silvei*  was  not,  of  eonrse, 
!i"eci\  eoini(i;  ;in(i  iiieicjore  i^ojtj  coiuii  iioi  in-  liioiii 
out   of  I'irculat ion.      The  yi)\ermnent  alone  hou^ht    the 


!iil 


lli 


Ml 


Kit) 


-MOM'.V    AM)    nA\KI\(; 


Sliver  bullion  in  the  market,  and  arrannrcd  for  its  coin- 
an-f.  To  uuard  against  possible  abuse,  the  sul)sidiarv 
silver  eoin  has  been  made  a  lr<ral  tender  only  up  to  .$10. 
The  prolit  arisino-  jn  eonneetion  with  this  eoina^re  is 
merely  an  incident  in  providin<r  the  country  with  a 
medium  of  exehanm'. 

1!>2.  Earhi  attempts  at  /////^///o//.-^After  1870  the 
annual  world  output  of  ..•old  fell  ofl':  and  as  a  result 
^•old  tended  to  appreciate  in  value  and  j)riees  I'eil.  This 
process  was  hastened  in  the  Tnited  States  by  the  con- 
traction of  the  pai)er  money  issu  j  during-  the  Civil  War. 
HuMiKss  biM.an  to  suH'er  as  prices  continued  to  fall.  It 
Avas  thouoht  to  improve  business  conditions  and  to  put 
an  end  to  i'allino-  prices  by  issuing-  an  additional  amount 
of  pajur  money.  This  led  to  the  formation  of  the  ^rrcen- 
l>ack  party  in  the  TOs.  It  was  stron^-  enou<rh  to  push 
Ihrounh  Cono-rcss  a  bill  which  i)reveiited  the  further 
retirement  of -.Teenbacks  and  provided  for  an  additional 
issue.  Tresident  (Jrant  xctoed  the  bill;  but  the  fiu-ther 
retirement  of  the  lirei  nbai'ks  ne\ertheless  was  brou^dit 
to  an  end.  and  the  (piantity  in  circulation  fixed  at  the 
amount  at  which  it  now  stands,  namely  $.'M.().()()().(H)0. 

This  attempt  to  raise  prices  by  further  pa|)er  money 
issues  was  unsuccessful  in  itself:  but  it  inau^nirated  a 
moxement  to  accomplish  the  same  purpose  with  silver  as 
the  means.  Olher  (nunlries.  lio\V(  \er.  wei'c  abandoning- 
tli«'  d'Miblr  standard.  The  decrease  in  the  i)ro(luction  o7 
/^'"'•I  ••'lid  the  increase  in  the  oiit|Mit  of  silver.  to<retJier 
villi  the  example  of  Kn<.-|;,nd  which  \\;is  on  a  y-old  basis. 
were  no  doubt  the  causes  which  in(bi<-i(|  the  bimetallic 
countries  to  demoneti/c  silver  at  this  time. 

!!».'{.  The  Liitiii  ('iiidii.  Prior  to  ISTJ.  l-'iancc  was 
i'i-  ^lM.^t  iritporiani  iiimeiaijic  country  in  tlie  world. 
Att.r   ISdt   I''iancc   was   in   uai^ue  with  several  of  the 


BI.MKTALIJS.M 


1(51 


smaller  countries  in  Europe:  Italy,  Greece,  Rpigiuni, 
and  Switzerland.  This  lea<rue  was  the  Latin  Vn'um, 
which  was  so  inii)ortant  an  element  in  the  silver  dis- 
cussion of  the  do's.  France  furnished  these  countries 
with  coins  of  n-old  and  silver,  so  that  for  monetary  pm-- 
poses  the  Union  might  he  coiisidered  as  one  country. 
The  Latin  Union,  tooetlicr  with  (Germany,  created  a 
demand  for  silver  which  maintained  its  value  for  some 
years  in  the  face  of  increased  production. 

In  1871  the  German  Empire  was  founded  and  the 
monetary  system  of  various  countries  composing  the 
emi)ire  was  entirely  reconstructed.  The  free  coinage  of 
silver  was  suspended,  and  supplies  of  gold  were  accumu- 
lated to  maintain  the  vahie  of  all  the  credit  money  of 
the  empire. 

France,  which  had  acted  as  an  e(iualizer  of  the  values 
of  gold  and  silver  in  Europe  u])  to  this  time,  in  187i 
superseded  the  free  coinage  of  silver  in  resjjonse  to  the 
tendency  of  the  times. 

U'4.  DcmoNcH-alioii  of  silver  h//  I  In-  r  nit  aJ  Staffs.^ 
A  series  of  compromises  had  hrought  about  the  same 
result  in  the  United  States.  The  coinage  of  silver  dol- 
lars—full     tender,     freely     coined     silver    dollars was 

dropped  in  ]H7'.i.  Paper  mon<y  alone  was  then  in  eli- 
eulation:  <lepreeiated  i)aper.  fiat  currency.  If  specie 
had  l)een  in  circidation  it  would  have  I.een  gold.  After 
1H.)(),  with  the  inllux  of  new  gold,  gold  hccanic  the  real 
i>asis  of  the  monetary  systt'in.  The  existence  of  ;i  nom- 
inal douhle  standard  was  forgotten.  In  187,'}  it  wis 
expected  'li.il  ilie  p.ipt  r  money  would  he  soon  gi\en  up 
■111(1  a  specii-  systdn  re-estai)Iishe(l.  Sp< cie  pavnieiits 
were,  in  fad.  n'suincd  in  IK7!>.  Hut  when  the  silx*  r 
'loilar  was  dropped  in  1H7.'J  from  the  list  of  coins  that 

could  l)e  struck.  hi?uel;dlisn).   |onn-  olvsojcte  in   nraetice 
^    vii-n 


I ,  j»| 


i 


I 
'I  I 


' 


It 


IG^^ 


MONHY    AM)    nANKIXc; 


was  finally  ended  by  law.  This  lias  been  often  called 
"the  crime  ol'  1873."  The  dollar  was  supposed  to  have 
been  (ir()pi)e(l  from  the  list  by  stealth,  by  persons  inter- 
ested in  the  gold  standard.  It  was  done  (juietly,  to  be 
sure,  probably  because  no  one  at  the  time  thought  it  of 
any  moment. 

10.).  Act.s  (jf  1.S7S  and  /s.'id,— The  greenback  ])arty, 
having  failed  in  its  attempts  to  issue  more  pa{)er  cur- 
rency, sought  to  secure  the  free  coinage  of  silver.  This 
it  could  not  effect;  but  by  way  of  comj)romise  the 
acts  of  187H  and  1890.  already  referred  to  in  a  previous 
clia|)ter.  were  passed.  These  measures  provided  I'or  the 
purchase  of  silver  bullion  by  an  issue  of  new  Treasury 
notes,  the  total  issue  amounting  to  $1. '5.), ()()().()()(). 

In  1878  the  HIand-Allison  Act  i)rovided  that  th-  gov- 
ernment should  purchase  not  less  than  -S'i.OOO.OOO  worth 
of  sihcr  bullion  nor  more  than  $4.0()().()()()  worth  each 
month,  the  bullion  to  be  coined  into  dollars  of  the  old 
.standard  of  iineness.  namely  .*J71.'-'.5  grains  of  j)ure  sil- 
ver. Oidy  the  minimum  amount  was  purchased  each 
month.  During  the  ])eriod  1878-181)0  about  2..)00.00() 
silver  dollars  were  coined  each  month.  80,000.000  a  year. 
These  dollars  were  overvalued,  limited  in  (|uantity.  of 
full  legal  tinder,  and  in  every  respect  a,s  valid  for  |)ay- 
ment  as  gold. 

In  18'.»0  the  .Sherman  Act  was  |)assed.  oidy  to  be 
repealed  three  years  later.  It  marked  another  comi)ro- 
mise  between  tin  friends  of  free  silver  and  its  opponents. 
During  the  threi'  years  of  the  life  of  this  act.  silver  was 
])urchase(l  jjy  the  government  to  the  e\!eiil  of  adding 
•21 8.000,000  dollars  to  the  country's  monev  supply. 
Tnder  the  act  of  1878.  a.')'_>.000.000  dollars  had  been 
coined:  so  that  when  these  operations  came  to  an  end 
570.000.000  dollars  of  overvalued  silver  had  been  coined 


lU.MF/IAM.ISM 


163 


;m(l  put  in  cirrulation.  At  one  time  hctwccii  1890  and 
IS'.t.'J  Ihc  silver  dollars  were  coined  to  sneh  an  extent  that 
they  seemed  a!)ont  to  drive  ^old  ont  of  eireidation.  This 
was  the  eliief  cause  of  the  panic  of  18!>;i,  whicii  led  to 
the  repeal  of  tlie  act.  Ouinu-  to  the  increase  in  tlie 
(•oinitry"s  ])opulati()n  and  c<»ininerce  since  IH'J.'J  tlie  de- 
iiiaiid  for  money  has  enormously  increased;  hetice,  <jfold 
has  remained  in  Die  conntry  side  hy  side  with  silver.  In 
other  words,  the  o\er\alued  silver  has  hce?i  as  o(K)(1  as 
.U'old. 

Il»(i.  liritisJi  Iiidirt  and  flic  roiiui^^r  of  ,sili-rr. In  1893 

Hritish   India  j)ut  an  end  to  the  free  coina^ro  of  silver. 
Hritish  India  is  the  most  important  connti'v  of  the  East 
and  had  always  ahsoi'hed   immense  (luantities  of  silver, 
it  had  freely  coined  the  siher  into  rupees,  whose  hullion 
content  is  ahont   two-iifths   that   of  the   I/nited   States 
dollar.     The  continued  fall  in  the  value  of  silver,  how- 
e\(r,  had   forced   the   l^ritish   n()vernment   to  close   the 
mints  of  India  to  its  free  coinage.     Thus  in  189.'}  the 
last  twooreat  mai-kets  for  silver     the  Tnited  States  and 
India-    were   closed.      Since  ISD.'J  silver  has  remained  at 
practically  the  same  level   in   resi)ect  to  its  yearly  pro- 
<luction  and  price.     The  price  has  heen  in  the  neij^dihor- 
iK.od  of  so.tio  ,„.,.  ,„,,uv:  and  that  has  made  the  market 
ratio  ahout  :}  !•  to  1.     It  follows  that  the  silver  dollar  is 
worth,  as  metal,  less  than  fifty  cents  in  ..-old.     Silver  no 
lonocr  has  .a    \'rvc  openinu-  j,,   nionetary   use.     As  suh- 
sidiary  coin  the  amount  that  shall  he  added  to  the  circn- 
latiny-  medimu  d.  |»ends  on  the  |)urcjiases  which  uovcrn- 
m(  nts  choos*    to  make,      Th-'  act   of   1900.  dcscril)ed   in 
a  previous  chapter,  where  i.v  the  treasnry  is  empowered 

•    ■":■-"■•■-■•"'•"•■.".•"■"•■    ii;    L;.'];;    ro    lii.ijiiTiiiri 

the  money  of  the  I'nited  States  nu  a  .u'old  hasis.  ensures 
that  the  silver  dollars  shall  circulate  at  par. 


1 1 

! 


\\ 


16  i 


MONEY   AM)   BANKING 


107.  Final  failure  of  bimetallism. — Bimetallism  might 
have  l)een  possible  if  Europe  had  joined  with  the  United 
States  to  bring  it  about.  But  there  never  was  a  chance 
for  concluding  such  a  compact.  Crreat  Britain  at  no 
time  was  friendly  to  such  a  proposal,  except  in  the  case 
of  British  India;  and  it  is  doubtful  whether  even  such 
a  great  silver-consu.ming  country  as  India  would  have 
brouglit  any  great  strength  to  a  bimetallic  league. 
W^ithout  (ireat  BrUain,  (iermany  woidd  not  come  in; 
and  M-itluHit  these  coimtries  the  United  States  would 
not.  So,  wliatever  the  abstract  possibilities  of  bimetal- 
lism, it  ne\er  had  a  working  chance  of  success. 

For  the  mass  of  tlie  people,  however,  the  problem  of 
general  prices  is  the  most  important.  How  far  would 
international  bimetallism  have  steadied  prices?  It  would 
depend  upon  the  extent  to  which  tiie  total  supply  of  gold 
and  silver  would  be  affected.  In  1H90  there  was  some 
reason  for  hesitation.  The  world  ])roduction  of  gold  was 
virtually  stationary;  while  that  of  silver  was  steadily 
growing  even  in  the  face  of  a  fall  in  its  price.  If  the  price 
of  silver  were  raised  to  $1..'}.'J  an  ounce  (the  price  in  the 
United  .States,  gold  correspor.;ling  to  the  ratio  of  1.5lo 
t(}  1 )  Hoods  of  silver  woidd  make  th-ir  appearance. 
Free  coinage  of  silver  at  this  ratio  would  have  doubled 
prices,  it  was  said,  in  ten  years.  The  bimctallists,  on 
the  other  hand,  maintained  that  the  increase  in  the  out- 
put of  silver  would  not  l)e  great,  and  that  with  a  sta- 
tionary output  of  gold  the  demand  for  silver  would  be 
so  great  that  changes  in  pi'ice  would  be  moderate  and 
would  be  spread  over  a  considerable  period.  They  fur- 
ther stated  that  any  upward  trend  in  prices  would  be 
beneficial  to  fbc  debtor  class. 

However,  al'ti  r  IHKO  tlie  danger  of  a  stationary  or 
declining  yearly  output  of  gold  disa])peared.     If  silver 


BI.AIKIWLLISM 


16.5 


liad  been  freely  coinable  as  well  as  gold  the  totai  money 
supply  would  have  inereased  at  an  enormous  rate.  Even 
witJi  the  low  priee  of  silver  in  IHD.'J  the  i)roduetion  did 
not  diminish.  ^\t  increased  prices  it  would  have  been 
/greatly  stinmlated.  In  a  word,  bimetallism  would  have 
unsettled  prices  to  a  much  greater  extent  tjian  even  the 
increase  in  the  world's  stock  of  gold  has  done.  The  ex- 
traordinary increase  in  the  ])roduction  oi'  gold  has  put 
an  end  to  the  propaganda  for  bimetallism.  The  rise  in 
l)rices  has  been  phenomenal,  and  has  prevented  any  fur- 
ther agitation  for  the  rehabilitation  of  silver. 


I 


1! 


CIIAPTKU    XI 

HIS'l'ORY  OF  CANADIAN'   MONKTAin'  SYSTEM 

1!)8,  Kcoiioiiiic  .sitiKilioii  ill  ('(HKida  (iftcr  the  Con- 
quest.— A  brifl'  sm\iv  of  the  iiiiancial  and  monetary 
system  of  Canada  is  essentia!  to  i)ut  the  student  in  toueh 
with  present  day  ])rot)lenis  in  that  country.  Jt  is  scarcely 
necessai'v  to  enter  into  the  niot)eta.rv  situation  (hn-in<)' 
the  I^'reneh  reoime.  however  ititerestinn'  that  miyht  he. 
C'aiuuhi  iWd  not  hecome  a  Hi'itish  possession  until  the 
Treaty  of  Paris  was  si^iu'd  in  1T<'>.'}.  although  Quehec 
capitulated  in  1T.")!>.  Voi-  some  time  ])recedin^'  the 
capitulation  of  (-^uehec.  the  ti'ade  of  Canada  had  heen 
almost  alto^ethei-  in  the  hands  of  ^oxernment  oilieials, 
who  manipulated  it  for  their  own  henetit.  As  a  result 
there  were  no  open  markets  I'or  the  produce  of  the 
couTitiy.  The  rapacious  agents  of  the  <.foveriiment  de- 
manded it  all.  They  paid  for  the  ])roduee  in  which  they 
dealt  with  depreciated  and  ultimately,  ahnost  worth- 
less— pa|)er  money  issued  hy  the  colonial  <4()vernment. 
After  the  fall  of  (^neluc  these  ollicials  returned  to 
France,  leaving-  Canada  practically  destitute  of  a  mer- 
cantile class. 

10!).  .V(  r.'  Kiii^]tiii(J  fniiJcrs.-  The  victorious  l^ritish 
ai'iiiy  was  followed  hy  a  force  of  shnwd  traders  from 
New  ^'ork  and  Massachusetts.  Tluy  came  to  C  anada 
to  seeui'e  a  share  of  the  eontrai'ls  for  furnishing-  the 
troops  with  supplies,  and  also  io  particiijate  in  the  fur 
trade  which  had  reached  enormous  ])ropoi-tions.  They 
dealt  e\tensi\ely  in  u'oods  of  l-'n^lish  manufa<'tui'e.  and 

liifi 


.■'^■■: 


HISTORY  OF  CANADIAN   MONETARY  SVSTKM       l(i7 


l)()iinlit  from  the  colonists  their  farm  produce  which  tliey 
exported  to  (ireat  Britain  and  the  West  Indies.  Thus 
the  wholesale  trade  of  Canada  fell  into  the  hands  of  Xew 
iMi^laiid  traders,  under  whose  control  it  remained  during- 
succeeding-  years.  ( )nly  the  retail  and  the  domestic  trade 
continued  in  the  hands  of  tlie  French,  The  racial 
differences  and  ])rejudices,  together  with  these  facts, 
explain  in  larfjfc  measure  the  discord  which  subsecjuently 
arose  between  the  two  races  in  Canada. 

The  New  England  traders  distanced  with  ease  their 
French  competitors.  The  vi^or  and  enterprise  of  these 
dealers  almost  at  once  ^ave  them  a  commanding-  posi- 
tion in  Canada.  To  them,  more  than  to  any  other  cause, 
was  due  the  recovery  of  the  colony  from  economic  paral- 
ysis. It  is  true  they  received  very  little  support  from 
the  p^ii^lish  military  administration.  The  army  officers 
who  held  the  country  and  administered  it  under  military 
law  affected  to  despise  these  merchants.  They  looked 
with  more  favor  n[)on  the  Canadian  noblesse  who  had 
remained  in  the  colony,  and  preferred  their  aristocratic 
society  to  that  of  the  democratic  and  resourceful  trades- 
men of  their  own  nationality. 

200.  Financial  situation  after  the  Conquest. — The 
military  occupation  of  Canada  lasted,  strictly  speaking-, 
from  17.39  to  17().'}.  During-  that  time  trade  i)y  the  com- 
missariat dei)artment,  the  IJritish  troo])s  ancl  the  Xew 
Fin<>'land  traders,  was  carried  on  in  British  currency. 
'I'he  paper  money  issued  during  the  French  regime 
fluctuated  in  value  with  every  rumor  of  its  |)ossible  re- 
demption. It  had  become,  in  fact,  an  article  of  wildcat 
speculation.  A  larye  (juajitity  of  French  coina^re  had 
disai)])eared   from  circulation  durin<2-  the  naner  delntre 


of  the  French   ascendai 


lev 


It 


a})peared   very   s 


lowlv 


iii 


I- 


ui)on  the  establishment  of   Hritish  rule.     Such  French 


■.\  t\ 


IGS 


M()M;V    AM)    HANKI,\(i 


ill 

ifi.  ■ 


(•(•ins  as  found  tlRir  way  into  circiilatioti  did  y.o  inostlv 
tlh'oiioli  ictiiil  tradr.  and  wcix'  accepted  on  a  .slii-litly 
o\crratcd  hnllion  hasis. 

When  the  trade  of  (Quebec  and  Montreal  be^*'an  to  re- 
vive tliron.irh  the  activities  of  British  merchants  from  the 
New  Knuland  colonies,  the  currency  standards  of  these 
colonies  l)e<,mn  to  prevail  in  commercial  transactions. 
'I'he  merchants  of  Quebec  we.e  most  closely  associated 
in  their  transactions  with  \ova  Scotia  and  especially 
with  Massachusetts,  while  the  Montreal  traders  and  tli<' 
inr  dealers  were  most  intimately  connected  with  the 
colony  of  \ew  York,  by  the  Lake  Champlaiii  route. 

Now,  the  Xew  lMi,nlan(l  colonies  were  closely  asso- 
ciated with  tile  West  Indian  trade;  and  so  the  Spanish 
dollar,  or  piece  of  eiyht   (S  reals),  had  come  to  be  the 
prevailing- coinage  in  circulation.    Through  it  exchan<«es 
were  made  with  (n-eat  Britain.     Nevertheless,  the  nom- 
inal standard   was  the  Eritisli  shillino-.     TJie   Spanish 
dollar  was  eiiuivalcnt  to  4s.  Od.  sterlinir;  but  owiii"-  to 
tlie  scarcity  ot  money  in  these  new  colonics,  there  was  a 
constant  tendency  to  overvalue  it.      In    Massachusetts 
and  Nova  Scotia  the  customary  ratinn-  was  .5s.,  while  in 
Xew  York  colony  it  was  7s.  (id.,  and  at  times  8s.     IJoth 
of  these  ratin^-s  were  introduced  by  the  merchants  com- 
ing- to  Canada.     The  former  was  })reval(.nt  at  (Quebec, 
where  it  was  known  as  Halifax  currency,  and  the  latter 
at  .^^ontreal,  where  it  was  known  as  \'ork  currency.     It 
was  not.  however,  untd  some  time  later  that  the  Halifax 
currency  standard  was  aiioj)te(l  for  o-overnment  purpo„es. 
I'Ol.  Kar!//  i\v  peri  in  tills  in   media  of  e.vchaiiffc.^ln 
18(M.  the  year  after  the  establishment  of  civil  mnern- 
ment  in  Canada.  (Governor  Murray  passc(1  an  ordinance 
'■for  re^ndatinn-  and   establishing-   tJie   currency   of  the 
provhice."     By  this  ordinance  the  chief  gold  and  silver 


IllS'l'OliV   UF   CANADIAN    .MONi/IAin'   ^VS'ri.M        |(!> 


I 


ciiiiis  fjunlliiir  to  Aiiu'ricaii  coloni;!!  iradi'  wvw  .st'j);i- 
ratcly  i-altd.  Of  tlic  sihcr  coins,  the  S[)aiii.sli  dollar  was 
rated  at  (is.,  tlic  l-'rciifii  crow  ii  at  ()S.  Sd.,  and  tlit  Hriti^h 
sliillino-  at  Is.  U\.,  the  Spnnish  pislarccn  at  Is.  "Jd.,  and 
the  French  iiinepeiiiiy  piece  at  Is.  currency. 

To  meet  the  need  of  IVactional  currency  it  had  heen 
custoniai-y  to  cut  ui)  small  coins  into  hahes  and  (juar- 
ters,  and  to  pass  tlie  sections  as  change.  'I'his  facilitated 
fraud,  so  the  ordinance  of  ITCt  ijroliihited  the  circula- 
tion of  cut  money.  A  more  successful  device  to  meet 
the  scarcity  of  fracti(-nal  currency  was  the  issue  l)y  the 
merchants  of  small  due  hills,  which  were  good  at  their 
face  value  for  merchandise  of  an  e(iuivalent  amount. 
In  cases  wliere  the  merchanls  who  issued  tJiese  l)ills 
were  well  known,  and  where  die  paper  was  honored  at 
once  on  demand,  these  notes  gained  a  more  or  less 
general  cii'culation,  and  in  this  way  met  a  very  real  need 
of  the  colony. 

This  ])aper  currency  originated  in  French  Canada, 
and  the  notes  were  generally  introduced  with  the  words 
Hon  pour.  Tn  this  way,  this  paper  came  to  he  nni- 
versally  designated  as  lions,  and  the  name  followed 
their  introduction  into  Tpper  Canada  at  a  later  date. 
Without  a  douht  these  lions  ])repared  the  way  for  the 
suhseciuent  issue  of  hank  notes.  An  enterprising  auc- 
tioneer of  Quehec.  with  no  small  degree  of  self-assur- 
ance, petitioned  the  Council  of  Quehec  in  17(>7  for  a 
monopoly  of  the  privilege  of  issuing  j)romIssory  notes 
for  small  sums  as  a  suhstitute  for  fi  actional  currency. 
Thi.^  ap])ears  to  he  the  first  aj)plicatioti  for  hanking 
privileges  in  Canada. 

202.  Shnuhinl  o/rnin'ii  of  fjir  cnjrtfiii — 'I''hf^  vatijifTo 
given  hy  Ckneral  Murray  to  a  numher  of  the  coins  listed 
were  not  consistent  with  each  other.    He  purposely  over- 


i 


i 


u 


! 

lii  ■ 

t  t  ;  • 


.£iil 


iiil 


170 


.AIONKV  AM)    HANKINT; 


rated  tlie  French  coins  in  order  to  draw  tlieni  once  again 
into  circulation,  and  retain  tlieni  in  the  country.     Some 
effort  was  made  to  secure  unirormity   thi-ou^hout  the 
colony:  hut    tliis  was  not   ett'ected  luitil   after  the  out- 
break of  the   American   rexoiution.      In    1777  an  ordi- 
nance  was    passed    makin-^'    the    Halifax    currency  the 
standard    money    for   the   coimtry.      'Die  merchants   of 
Quehcc  a?id  Montreal  had  not  l)een  ahle  to  come  to  an 
agreement  on  this  rnatter:  hut,  a*  the  outbreak  of  the 
American  war.  the  (luestion  had  been  decided  in  favor 
ol"  the  merchants  of  (Quebec,  the  Montreal  traders  bein<r 
suspected  of  sym])athizing  with  the  revolutionists.     ]Jy 
an  ordinance  passed  in  1777  the  .SiJ-  Mish  dollar  was  rated 
at  5s,,  the   Hiitish  and   l-'reneh  crowns  at  .)>    (>d.  each, 
tlic  British  shilling  at  Is.  Id.,  and  tlie  Spanish  ])istareen 
at  Is.     It  is  intertsting  to  oi.Mi         in   this  connection, 
that  as  compared  witii  tlii'  standard  dollar  the   Hrilisli 
crown  was  underrated  to  the  extent  of  td..  with  the  rc- 
.sult  that  it  disap|)cared  from  eiiculation.     On  the  other 
hand,  tlic  I-'rench  eiown  was  made  by  law  to  cii-culate 
at  more  than  if  was  worth,  and  hence  was  in  ukh-c  ••en- 
eral  u^(•  than  even  the  S|)anish  dollar.     Th'-  pistareen. 
too,  was  by  this  ordinance  gi\en  a  \alue  far  more  than 
it  wns  worth,  and  as  a  result  was  attracted  in  large  sums 
to  the  colonw      I'"oi-  a   time  it   was  irseful  in  increasin<>' 
the  suppl\-  of  fractional  currency:  but  lat(  r  it.  with,  the 
French  crown,  became  a  source  of  much  trouble  and  ex- 
y)ense  to  the  whohs.-.Ie  merchants  and   tlie  b.anks.     The 
^old  coins,  too.  had  been  ni\,.n  ;i  |,.n;i|  value:  but   from 
them  no   h'oulilc   was   (■\peii<iice(l.      The  eliK  !'  of   these 
"ere  till     Hiiiisli   tiuirMa.   ral((|   al     LI    ;{s.    Id.,   and   the 
Portnuu*  SI'     .Inhannes     comnioidy     calhd      ".Foe"    -jit 
•i-  i    is. 

•Jn.'{.   ('lutii-ifs  ill    I  he  I'll  n; lie//   nlhr    / ,  .v,;.  - -1  )iu'inu- 


illSTOHV   OF  CANADIAN   MONl/lWUY   SVS'IK.M       171 


the  Hc'volutioiiarv  War  so  iiiucli  specie  was  sent  to 
Canada  hv  tlie  Hrilisli  Treasury,  in  support  of  the  civil 
and  military  administration  of  the  country,  that  Cana- 
dian merchants  informed  the  home  authorities  that  it 
was  unnecessary  to  ship  fui'ther  supplies  of  specie  to  the 
colony,  as  they  coidd  secure  all  that  was  needed  l)y  send- 
ini'-  to  Knulaiid  the  Treasurv  l)ills  which  thev  had 
accepted  as  payment  for  sui)plies  furnished  the  •govern- 
ment in  Canada. 

When  trade  with  the  American  colonies,  now  hecome 
the  Ignited  States,  was  resumed,  the  Canadian  merchants 
who  dealt  in  international  exchan<4e  found  that  the  over- 
ratiiiii-  of  certain  coins  involved  them  in  considcral)le  loss. 
They,  therefore,  jjctitioned  the  imi)erial  <40vernment  to 
rcmedv  these  evils:  but  no  further  change  was  made 
until  the  division  of  the  colony.  ii\  IT'.M,  into  the  prov- 
inces of  I'ppcr  aud  Lower  Canada.  'IMiereujion  an  act 
was  ])assc<l  in  Lower  Canada,  and  soon  afterwards  in 
Lpper  Canada  also,  pcrmittinu"  slightly  worn  ^old 
coins  to  ])ass  at  their  full  face  value  in  order  to  encour- 
a^'c  their  remaining'  in  circulation.  The  act  also  Icoal- 
i/i(l  the  new  American  coins,  the  cayle  and  the  dollar, 
rating-  them  at  €2  10s.  and  .5s.  respectively. 

•20i.  Difficult//  of  clKHi^iiii^-  jiractici'.  As  is  very 
often  the  case,  custom  did  not  altogether  carry  out  the 
Itlter  of  the  law.  It  still  was  the  current  practici-  for 
Montreal  and  Lj)ptr  Canada  merchants  to  carry  on 
Ihcir  business  in  ^'ork  currency.  althou<ih  Halifax  cui'- 
rencv  bad  been  made  the  standard.  'I'his  is  readily 
undi'rstood  when  it  is  recalled  llial  the  li.valist  mIIK  nu  nfs 
in  I  'ppcr  C'anada  (  iicourayvd  the  merchants  in  this  prac- 
tice. 'I'liesc  I<i\alists  had  come  frotu  New  ^'(>I•k.  New 
.lersey  and  the  adjoinin.u'  districts  (if  IViinsyh  ania.  So 
d(  <  py  roote<l   was  the   ^'^l|■k  euri<  ncy  in  tlii'  lnwns  ami 


MONEY   A\n   R AXKTN'G 

conntiy  dislHcts  of  ['vpvr  Caiiad;^  that  oven  to  tlii.s  (lav- 
prices  arc  oftt'ii  (jiiotcd  among  the  I'arnier.s  and  local 
dealers  in  ^'ork  shilhims. 

Tlie  orioinal  York  shilling,  as  is  well  known,  was  tlie 
:Me.\icai)  real,  hut  in  later  times  it  Ijccanie  known  as  the 
British  sixpence.  The  use  of  York  currenev  was  so 
wides|)read  that  it  created  a  great  deal  of  tronhle,  espe- 
cially in  legal  srttlements  of  business  affairs;  so  that 
finally  in  1821,  hy  act  of  parliament,  it  was  deprived  of 
legal  recognition.  In  Lower  Canada,  among  the  peas- 
antry, the  French  Hvre  held  much  the  same  place  as  York 
currency  in  the  sister  i)r()\  ince. 

20.).  Jet  of  /mv.— After  the  decimal  currency  system 
liad  hecome  thoroughly  estal)lishcd  in  the  Fnited  States, 
much  of  the  worn  and  dcfae,  ,1  displaced  coinage  ^'ound 
Its  way  across  the  border  lo  Canada.  The  comparative 
scarcity  of  coins  there,  especially  f„r  fractional  currency, 
prevented  the  old  American  coins  from  being  too  closely 
scrutim/ed.  Those  merchants  who  dealt  in  foreign  trade 
were  cone.  rned.  for  the  most  part,  with  the  state  of  the 
gold  coins  and  their  exchange  values.  Thus,  an  act 
|)assed  in  ISOH  dealt  only  with  the  exchange  relations  of 
gold  currency. 

During  the  perio.l  following  the  liritish  occupation 
of  C'ana.la  up  to  ISnS,  the  imperial  government  took 
ycry  little  interest  m  the  monetary  system  of  the  colony. 
The  British  aulhoriliis  n  ,,uired  the  Canadian  adminis- 
I'-'ti""  to  keep  its  acrount  in  the  sterling  standard  of 
Knglan.l.  Neverthel.  ss.  ||,..  sjurie  employed  i,,  the  pay- 
iiKiit  of  thr  tro.»ps  and  m  meeting  oth,.,-  expenses  was 
not  as  a  rule  Hrifish  coinage  but  Spanish  dollars,  rated 
|<l  ^s.  (Id.  each.  The  S|,anish  dollar  passed  in  trade. 
'™;'  ■•  ••'  •'^-  '^"  ii''''  *•!•■  -'idler  r.reived  a  premium 
ol  (5d.  currency  on  each  .loll,,r.     In   ihos  the  pninium 


v^     ^^ 


HISTORY  OF  CANADIAN  MONETARY  SYSTEM       173 

w;is  reduced,  the  imperial  government  thei'eafter 
j)ayiiig  out  tlic  Spaiiisli  dollar  at  the  rate  of  -is.  8d.. 
Nterliiig. 

•20iK  Dnid   funvlions    of    the    carli/    Canadian    mcr- 
iJ'.ant.-'  'V\w.    large   merchants,    especially    in    Western 
Canada,  not  only  carried  on  the  import  and  export  trade 
of  the  colony  but  dealt  in  1'orelgn  exchange  as  well.    As 
a  matter  of  fact,  nearly  all  exchanges  were  made  through 
them.    They  extended  credit  to  various  persons  in  nearly 
every  line  of  business  and  honored  drafts  drawn  on  them 
both  for  goods  and  money.    They  conducted  the  foreign 
exchange  bus-ness   through  their  agents   in   Montreal, 
who  procured  such  foreign  bills  as  they  recjuired — most 
of  them  from  the  civil  and  military  administration.     The 
large  import  houses  of  Montreal  in  reality  carried  on  a 
banking  business  with  the  merchants  of  the  ujjper  prov- 
ince.    They  received  cash  dejjosits,  made  payments  as 
ihey  were  directed,  and  extended  credit  to  be  met  in  the 
future  either  by  produce  or  cash.     This  combination  of 
functions  gave  them  very  extensive  power  over  the  dis- 
tricts tributary  to  them,     (governor  Simcoe.  of  Tpjier 
Canad'i.  recognized  this,  and  so  sought  to  displace  the 
merchants  by  establishing  grain  and   Hour  stores — the 
torerunners  of  the  modern  elevators.     These  stores  were 
to  be  under  governmental  control  and  super\  ision.     The 
Lords  of  Trade  in  (ireat  JJritain.  however,  vetoed  .Sini- 
coe's  plans. 

•JOT.  Karlji  d((din^s  in  lOrii:^!!  crcZ/rw^'-r.— Canadiai* 
trade  with  the  I'niled  States  had  been  greativ  stimu- 
I.ttcd  after  Jay's  Trcaly  of  IT'.U.  Mndi  of  tlie  Ameri- 
an  produce  I'lom  the  West  found  its  \v:\y  to  the  l\uro- 
pcan  market  through  Canadian  merchants.  The  Hritish 
uovernment  was  obliged  to  purchase  large  supplies,  too, 
for  the  garrisons,  which  they  paid   for  with  bills  drawn 


IIJI 

ill 
II 


III 


17i 


.AIONHV   AND   RAMvIXG 


mp. 


upon  the  Treasury  in  Enf^iaiul.  As  a  eonseqnence  of 
all  this,  at  times  niueh  Canadian  euneney  was  sent  to 
the  neif^hhoring  states.  On  tlie  otlier  hand,  hills  drawn 
on  IJiitain  were  often  in  exeess  of  the  loeal  demand 
while  they  were  at  a  i)reniium  in  the  rei)uhlie.  This  led 
to  a  profitahle  e\elian<^e  Ousiness.  es{)eeially  hetweeii 
Montreal  and  Xew  Vork.  The  eneouraninH'  sueeess  of 
the  liank  of  the  United  States,  founded  hy  ^Vlexander 
Hamilton,  together  with  the  extensi\e  exehan^e  liusiness 
just  deserihed,  led  to  a  demand  in  ISO?  for  a  Canadian 
hank.  Jiut  the  rapidly  inereasino-  fi-iction  hetwcen  the 
United  Kin<^(lom  and  the  United  States  prevented 
the  pi-oposition  from  l)eino-  carried  out,  as  war  was  de- 
clared hy  the  repuhlic  in  1812. 

208.  fl'ar  (if  isi  j  ///  Us  nUdion  in  Cdnad'uin  finance. 
—  .Just  hefore  the  War  of  1812  the  Canadian  grain  and 
Hour  trade  was  in  none  t  'o  prosperous  a  condition.  This 
was  ehielly  owin^'  to  the  fact  that  the  British  Corn  Law 
had  j)rovided  for  a  sliding-  scale  of  duties,  which  had 
meant  for  Canadian  cx|)orters  low  prices  and  lon<i^ 
credits.  Hut  the  outl)reak  of  war  led  to  large  expendi- 
tures in  Canada  hy  the  imperial  <;o\xrnment.  In  nor- 
mal times,  the  pui'chasc  of  supphes  in  Canada  would 
h,i\e  heen  met  hy  hills  of  iwehange  on  the  Hritish  Treas- 
ury: hut.  there  heing  little  specie  iii  Canada  now  with 
Mhich  to  j)ui'chase  them,  and  it  heing  too  risky  to  im|)ort 
large  supphes  of  specie  during  the  war,  the  Jiritish 
goxcrmiunt  arran^dl  \\'v  the  issue  of  ai-mv  hills.  These 
wvvv  simply  orders  on  the  British  '1' casury  for  con- 
venient amounts  of  standard  uioniy.  'I'hc  v  were  not, 
therefore,  paper  money  in  the  ordinaiy  sense  of  the  term. 
They  wvw  designed  simply  as  a  convetiicnt  means  of 
supplying  l{i-itish  moni  v  to  Canada  with(!ut  ninnlng 
the  risks  incident  to  ^var. 


■'■m^\: 


iirsTORv  or  canadiw  monetary  system     175 


209.  ^Utitiidc  toicard  pajnr  currciicif. — At  first,  the 
l"'reiic'h  Canadians  were  very  suspieious  of  the  new 
|)a])er  currcney.  recalling'  as  th<y  did  their  unhappy 
e.\[)eiienee  with  the  notes  issued  hy  the  French  govern- 
ment hefore  17."5!).  They  therefore  hxst  no  time  in  con- 
\ertinf>'  the  new  notes  into  specie  whenever  they  fell  into 
their  hands.  l?ut  .soon  they  gained  confidence  in  the 
new  i)aper  money,  which  ])erformed  its  functions  with 
the  greatest  elhciency.  These  notes  hore  interest  and 
those  of  the  larger  denominations  were  convertihle  into 
liills  of  exchange  drawn  on  the  IJritish  Treasury.  Cer- 
tain small  denominations  hore  no  interest  and  were 
jiayahle  on  demand  at  the  army  hills  otHce.  Soon  nionev 
became  plentiful  throuj'hout  the  colony.  The  war,  as 
far  as  Canada  and  the  i'e])ul)lic  were  concerned,  was 
really  a  tame  affair.  There  were  a  few  skirmishes 
wiiicli  Canadian  and  iVnicrican  historians  have  glorified 
until  they  have  hccome  great  battles.  It  has  often  been 
noted  that,  generally  speaking.  Ciirat  Hritains  wars 
have  always  meant  high  prices  and  prosj)ei-ity  for  Can- 
ada. It  was  ji'stingly  said  that  the  litiugy  of  Canada 
contained  a  fei'vent  |)rayei-  "for  a  bountiful  harvest  and 
a  bloody  war."' 

The  ariny  bills.  ]u)wcver,  althongli  tlicy  did  serve  as  a 
medium  of  exchange,  were  not  designed  as  such.  In 
i(  ality.  they  were  simj)ly  bills  of  e\c-hange  used  to  pay 
Canadian  merchants  for  sup|)lies  furnished  the  military 
administration.  These  bills  w*  -e  sold  throughout  the 
wai'  in  Xew  l''nghmd  cities,  where  tiny  found  ready 
biiyei's;  for.  as  is  will  known.  New  Kngiand  was  abso- 
lutely oj)posed  to  this  useless  war.  'I'hese  notes  fatnil- 
iari/ed  the  Canadians  \\ith  papei-  currencv.  and  i)avc(l 
the  way  for  the  successful  launching  of  se\cral  banks  in 
the  tiear  futmx'. 


'^x 


17G 


MC)M:Y   AM)   BANKING 


III 


210.  Origin  of  the  ^rcat  chartered  hanks. — In  1815 
and  the  following  year  an  attempt  was  made  to  secure 
a  charter  for  a  CanacHan  bank.  It  was  tlie  general 
opinion  that  a  provincial  bank  whicli  had  the  power  to 
issue  paper  money  would  greatly  aid  the  trade  and 
commerce  of  the  country.  Its  notes  would  take  the  place 
of  the  retired  army  bills.  In  181<>  and  again  in  1817 
attempts  were  made  to  secure  })ank  charters;  but  in 
both  tiiese  years  constitutional  difliculties  led  to  the  pro- 
rogation of  the  legislature  before  the  bank  bills  were 
reported. 

All  efforts  to  secure  a  charter  from  the  legislature 
having  failed,  several  Montreal  merchants  and  others 
who  were  interested  decided  to  estal)lish  the  bank  as  a 
private  corporation.  On  May  17,  1H17,  the  Articles  of 
Association  of  tlie  Bank  of  Mor.treal  were  ado])ted; 
and  ten  days  later  they  were  published  in  the  Montreal 
Herald  in  separate  form.  It  is  interesting  to  observe 
that  Americans  subscribed  a  large  portion  of  its  early 
caj)itnl.  and  several  of  its  chief  oflicers  came  from  the 
Cnited  States. 

211.  Alexander  II(imUt(fn's  principles  adopted.— In 
its  essential  and  most  characterislic  features  the  Bank 
of  Montreal  paved  the  way  for  subse<juent  banking 
legislation  and  ])ractice.  To  this  day  the  central  facts 
of  Canadian  banking  are  founded  on  tliis  eaiiv  ex])eri- 
nient.  It  is  of  more  than  ordinary  interest  to  note 
that  the  Canadian  banking  system  was  founded  )n  the 
j)rineij)les  hiid  down  ir;  fjie  First  l?ank  of  the  Tnited 
States  a  bank  which  was  established  along  the  liius 
advocated  by  the  great  American  statesman  Alexander 
llamiltoii.  who  was  tlu'  first  Sicrctary  of  tji(>  Treasury. 
In  I  hi'  following  year  t]n'e(>  other  ])rivate  banks  were 
cstablislud  in  Canada.     These  were  the  (Quebec  Bank 


HISTORY  OF  CANADIAN-  MONETARY  SYSTK.M       177 


at  Qucl.cc;  tiic  Bank  of  Canada  at  Montreal,  and  the 
Hank  dC  Upper  Canada  at  Kiii'^rston.  All  of  these  fol- 
lowed, with  slioht  nioditications,  the  articles  of  associa- 
tion of  the  Bank  of  Montreal. 

212.  Articles  of  association.— The  Icadinf?  featnrcs  of 
these  articles  were  as  follows:    The  authorized  capital 
nf  the  hank  was  £;2.5(),()0()  cin-rency,  or  -"i^l/JoO.OOO.     TJie 
shareholders  were  liahle  only   to  the  amount  of   their 
suhscrihed  shares,  the  douhle  lial)ility  clause  l)ein^-  intro- 
duced much  later.     The  bank  was  'forl)i(lden  to  deal  in 
real  estate  or  to  lend  money  on  mort,!jfaoes,  althou^i^di 
niortga<res  mi«,dit   he  taken  as  collateral  security.      Jt 
was  i)ermitted  to  deal  in  promissory  notes,  to  receive 
dei)(),sits,  and  to  huy  and  sell  hills  of  exchan,i,''e  and  <,n)ld 
and  silver  bullion.      It  was   i'urther  provided  that   the 
total  liabilities  of  the  institution  could  not  exceed  three 
times  its  paid-up  capital.     The  directors  were  oblioed 
to   submit    an   amiual   statement   to    the   sharehoklers, 
c.xhibitino-  the  total  assets  and  liabilities  of  the  bank,  the 
amount  of  the  notes  in  circulation,  bad  or  doubtful  debts, 
and  the  surplus  or  profit.     The  bank  was  permitted  to 
establish  branches  in  other  parts  of  Canada. 

A  numl)er  of  well-to-do  French  Canadians  took 
stock  in  the  bank,  and  entrusted  it  with  their  deposits. 
^'et  the  country  people  were  somewhat  dubious  of  the 
soundness  of  the  institution;  and  therefore  (juickly 
turned  in  its  notes  for  cash.  In  this  way  the  elasticity 
of  the  notes  of  the  liank  of  Montreal  was  retained. 
In  Tppcr  Canada,  on  the  other  hand,  the  banks  received 
every  encouraoement.  and  their  notes  t'ound  wide  cir- 
culation. TTence  they  sidlVred  more  severely  in  time 
"f  crisis,  as  many  notes  which  bad  been,  lon.'j-  !>i  elrcii- 
lation  were  ])resented  for  payment.  It  was  not  until' 
1822  that  the  three  Lower  Canadian  banks— the  Bank 

C— VII— 12 


liitf 


.'«a'-j.t^<N 


_^ 


17S 


MONEY   AND   RANKING 


of  Montreal,  tlif  (:^iu'l)cc  Hank  and  the  Bank  of  Canada 
— became  regularly  chartered  institutions  under  the 
government. 

213.  First  hanhs  of  Upper  Cdiiada. — In  Upper 
Canada  the  need  of  banking  facilities  was  also  felt. 
Ini])atient  at  the  delay  of  the  government  the  promoters 
decided  to  establish  a  bank  on  the  model  of  the  Bank 
of  Montreal.  Accordingly,  in  1818,  the  Bank  of  Upper 
Canada  was  established.  The  capital  stock  of  the  new 
bank  was  fixed  at  tfJo.OOO  currency,  or  .$(;2.),()()().  Thus, 
in  .\pril,  181!),  the  private  Bank  of  U])per  Canada 
opened  its  dooi's,  and  soon  found  wide  circulation  IV.r  its 
notes.  As  a  matter  of  fact,  following  the  army  bill  ex- 
pei'ienee  of  the  War  of  1812,  the  British  people  were 
much  too  ready  to  accej)t  the  notes  of  the  new  banks. 
i\t  the  same  time  Upper  Canada  was  being  flooded  by 
^Vmerican  bank  notes.  Soon  after,  in  1821,  the  Char- 
tered Bank  of  Uj)per  Canada  received  its  charter  from 
the  legislature  and  soon  afterwards  began  business. 

A'ery  soon  afterwards  the  Bank  of  Canada  at  Mon- 
treal and  the  JJank  of  Upper  Canada  at  Kingston  were 
<ib]iged  to  close  their  doors.  The  prosperity  of  the 
colon v  suffered  a  severe  shock  after  the  lontr  and  ex- 
hausting  Xapoleorn'c  wars.  The  three  Canadian  banks 
at  Quebec.  Montreal  and  ^'ork,  however,  became  thor- 
oughly established,  and  ad()j)ted  a  conservative  ])olicy 
in  the  discounting  of  notes  and  in  the  issuing  of  their 
bills. 

214.  Allcmpts  at  currcncji  /'(/or;;?.— Shortly  after 
1822  an  imporlant  expirimenl  was  attempted  in  cur- 
rency I'eform.  The  Hiitisji  government,  owing  to  the 
dillieulfies  exjjerienced  durinu'  the  suspension  of  specie 
payments  at  the  time  of  the  Napoleonic  wars,  h.  d  de- 
cided, in  181(>,  to  i)laee  its  curiency  on  a  gold   ijasis. 


HISTORY  OF  t'ANADLvX  .\I(>M;J.\UY  SVSTll.M       179 


Silver  coinage  was  made  a  token  currency  by  raising*  its 
face  value  soniewliat  aho.e  its  bullion  value  and  limiting- 
its  legal-tender  properties  to  iOs.  Tlius,  silver  was  main- 
tained as  a  simple  t'raetionad  currcnc}'.  Tbe  new  regu- 
lations operated  so  successfully  that  the  Bank  of  Kng- 
land  resumed  specie  payments  in  1821. 

The  IJritish  government  resolved  to  introduce  the 
gold  standard  into  all  parts  of  the  emj)ire,  beginning 
u  ith  tile  more  important  colonies.  It  was  proposed,  in 
18*J.5,  that  for  Canada  the  sterling  standard  should  be- 
eome  universal;  and,  fui'tlier,  that  the  British  siher  and 
copper  coinage  should  l)e  employed  I'or  all  moderate 
payments;  while  larger  payments  should  be  made  by 
ineans  of  bills  of  exchange  issued  at  the  fixed  rate  of 
.'J  per  cent  per  annum.  In  other  words,  £100  sterling 
payaljle  in  Britain  would  be  exchanged  for  £10.'J  ster- 
hiig  payable  in  the  colony.  It  was  exi)ected  tliat  British 
silver  and  co])])cr  c(Mns  would  remain  in  the  colony  and 
furnish  a  permanent  medium  of  exchange.  It  was  not 
thoughi,  ho^  ver,  that  the  Spanish  silver  dollar  could 
be  dispensed  with  at  once;  so  it  was  provided  that  for  the 
future,  it  should  be  rated  at  4s.  4(1.,  with  other  silver 
corns  in  like  projiortion. 

•J1.5.  Iicsiilt  (if  ciirroici/  reform. — As  a  result  of  all 
this,  an  order-in-council  was  sent  to  the  British  Xorth 
American  colonies,  among  other;,  virtually  making 
Hiitisli  silver  an  unlimited  legal  tender  and  liritish 
copjier  coins  legal  tender  to  lOd.  James  Stephen  (after- 
^\ards  Sir  James),  legal  adviser  to  the  colonial  otlice. 
gave  it  as  his  o])in!on  that  ITi*;  Ma_)esty  had  no  |)owfr 
bv  order-in-council  to  change  the  ratinjp  of  coins  fixed 
\)v  the  Iro'isilaturo  of  the  colon.ies.  TTis  oninion.  b.owever. 
was  overnded  by  the  attorney-genend  and  solicitor- 
general.    ^Vhen  Lord  Dalhousie  attemj)te(l  to  carry  out 


ISO 


M()M:V    AM)   HANKIXG 


liis  instructions  lie  I'ound  the  lc<4islaturc  of  Lower  Can- 
ada unalterably  oj)j)()se(l  to  it.  They  simply  shelved 
the  whole  matter  \\  hen  it  was  referred  to  them. 

In  Uj)j)er  Canada,  the  people  and  the  legislature  de- 
clined to  ado])t  the  Hritisli  monetary  standard.  Al- 
though the  otHcial  standard  was  the  pound  currency, 
the  people  had  become  accustomed  to  doing  business 
in  dollars  and  cents.  The  bank  notes  in  both  provinces 
were,  as  a  matter  of  fact,  printed  in  the  American 
standard.  The  F|)j)er  Cana.dian  legislature,  in  response 
to  the  message  of  the  lieutenant-governor  with  the  ac- 
com[)anying  documents  of  the  Treasury,  simply  raised 
the  rating  of  the  British  silver  and  copper  coins.  The 
crown  was  rated  at  os.  Dd.  instead  of  .5s.  6d. ;  the  shilling 
at  Is.  2(1.,  instead  of  Is.  id.,  and  lOd.  in  British  copper 
was  made  the  e(|uivalent  of  Is.  currency. 

•JK).  Kxchdh^c  i\:iih  the  United  Kingdom. — The 
British  government  was  thus  frustrated  in  its  attempt  to 
alter  the  legal  basis  of  the  Canadian  currency.  In  an- 
other way,  however,  it  had  conunand  of  the  situation 
through  the  exchanges.  The  Treasury  now  sent  out 
t3(), ()()()  sterling,  in  silver,  and  a  consi(lcra})le  sum  in 
copi)er  coin.  Instructions  were  sent  to  Canada  that 
henceforth  supplies  for  the  imperial  officers  were  to  be 
stated  in  terms  of  sterling  money.  Payments  for  these 
suj)plies  and  also  ])ayments  to  the  troops  were  to  be  made 
on  the  same  l)asis.  Whenever  the  Spanisb  dollar  was 
enjployed  it  was  to  be  thereafter  rated  at  only  4s.  4(1. 
Payment  for  large  sums  might  be  made  in  specie  on 
this  basis,  or  in  bills  of  exchange  drawn  on  the  Treasury 
in  London  at  the  rate  of  €100  sterling  for  £I03  of 
the  eniitract.  l^it  owing  to  the  constant  demand  for 
l)il!s  of  exchange  l)y  the  Canadian  meivhants,  and  be- 
cause of  the  tleclaration  of  the  government  that  these 


HISTORY  OF  CANADIAN    M0N1:TAHV   SYSTEM       ISl 


•^^1 


liills  would  he  issiud  tni'  Hrilish  sihcr  ;il  li  per  cent 
|i!vmiuin,  the  IJritisli  eoius  were  eonstiUitly  witlulrawn 
t'lODi  circulation  to  purchase  bills  of  exchange.  As  a 
ic  suit,  the  very  machinery  which  was  to  ensiu'e  the  cir- 
culation in  Canada  of  liritish  coina<;e  resulted  in  vir- 
liially  dri\ing-  it  out  of  use;  and  the  iield  was  left  to 
the  i)aper  issues  of  the-  Canadian  and  American  banks, 
supplemented  by  French  silvci*  in  Lower  Canada  and 
American  and  Si)anish  siher  in  Upper  Canada.  It 
was  sof)n  discovered,  too,  that  the  premium  of  3  per 
(■(lit  on  IJi'itish  bills  was  too  high.  It  was  cheaper  to 
(  xport  the  IJi'itish  silver  directly,  which  was  done.  As 
a  result,  the  military  authorities  were  forced  to  receive 
,ind  pay  out  little  else  than  Spanish  and  ^Vmerican 
dollars,  and  fractions  thereof.  In  conse([uence,  the  Treas- 
ury reduced  the  ])remium  on  excha.nge  from  3  to  ll  o 
])er  cent,  and  bills  of  exchang(  c'e  more  resumed 
their  place  as  the  standard  means  ot  laking  payments  in 
Hritain. 

-17.  Canadian  currnici/  in  tJic  second  quarter  of  the 
iiinefeenlJt  ceuturi/. — The  failure  of  the  attem])t  .f  the 
Hritish  o()vermnent  to  establish  the  sterling  standard  in 
Canada  revealed  ceitain  peculiarities  and  anomalies  of 
the  Canadian  monetary  situation.  The  Canadians  had 
adopted  a  ])urely  tv.inentional  standard,  the  Halifax 
pound.  There  was  no  coinage  corresponding  to  it;  and, 
therefore,  it  was  necessary  to  utilize  as  a  medium  of  ex- 
change such  foreign  coins  as  were  available  in  the  course 
'if  trade.  Thus,  it  was  found  necessary  to  admit  to  un- 
iimited  legal  tender  a  variety  of  coins  over  the  issue  of 
\\hich  the  Canadian  Icgislatiuv  had  no  control.  It  was 
Mot  iiossiblc  to  nlace  all  th.ese  coins  on  ti  uar  ^^■!tll  each, 
other  according  to  their  real  value:  for  that  would  have 
involved  various  awkward  fractions  most  inconvenient 


i  i 


'  J 


'!'{• 


183 


M()\EV   AND   BAXKIXG 


IH 


m 


i'or  tiRir  rapid  circulation.  M()rc()\cr,  exact  ratinfj^s 
could  lia\e  a|)|)li(.(l  only  to  coins  of  lull  weight,  and 
unaliVctcd  I  y  I'atcs  of  cxclian^'c.  .\s  a  matter  of  fact, 
British  and  Anicrican  coins  in  ])articular  (luctuatcd  in 
value  with  the  I'ate  of  exclian^'e  on  their  respective  coun- 
tries. And,  moreover,  except  for  the  <4dld  coins,  the 
ofl'icial  I'atin^'  applied  to  them  was  hy  tale,  not  hy  wei<4"ht. 
As  a  result,  it  was  made  prolitaMe  to  import  and  retain 
in  circulation  all  manner  of  worn  ;nul  defaced  coinaj^e 
from  every  country  with  which  Canada  had  coniniercial 
dealings, 

•Ji8.  Varichi  of  coins  '■ircnJ(iit(L--The  most  common 
of  the  smaller  coins  in  circulation  was  the  Spanish 
])istareen.  the  most  worn  and  defaced,  too,  of  all.  It 
had  been  discarded  hy  the  Americans  when  they  ado])ted 
their  national  cui'reney.  It  ])assed  current  in  Canada 
for  Is.  or  20  cents,  whereas  in  the  adjoinin<i'  states  it 
did  not  ])ass  for  more  than  17  cents.  In  1830  it  was 
reduced  to  lod.  in  Lower  Canada  and  excluded  from 
the  list  of  legal  tender  in  l'|)i)er  Canada.  For  lack  of 
small  chanye.  howe\er.  it  still  contimied  to  circulate. 

Durino-  the  second  (juarter  of  the  nineteenth  century 
the  Canadian  curi'ency  broker  cari'ied  on  an  extensive 
and  j)aying  business.  His  ollice  was  a  veritable  curios- 
ity shop,  exhibiting,  as  it  did,  the  remnants  of  several 
national  currencies  in  the  last  stages  of  demoraliza- 
tion. Only  the  chronic  scarcity  of  coinage  in  times  of 
peace  enabled  this  motley  assemblage  of  coins  to  ])ass 
current  in  the  market-place.  The  copper  currency  was 
worst  of  all.  I)eing  composed  of  discaided  British  half- 
pence and  farthings.  Even  at  that,  the  suj)ply  was  de- 
ficient to  meet  the  needs  of  the  counti'V.  Private  mer- 
chants  Ix'gan   to   imjjoi't   su|)plies   for   themselves,   and 


these 


'Pi 


sununcs 


assec 


1  int( 


o  general  circulation. 


HISTORY  OF  CANADIAN   M()N1:TAHV  SYSTEM       IS;; 


Other  attempts  were  made  from  time  to  time  to  induce 
the  colonies  to  adopt  the  sterUng  standard,  hut  with  no 
success.  The  trend  of  mercantile  and  bankin<^  usa^e, 
as  well  as  that  of  popular  sentiment,  was  distinctly  in 
favor  of  the  decimal  currency  of  dollars  and  cents.  Dur- 
ing the  period  from  1823  to  183,5  there  were  maiiy 
rumors  of  proposals  for  improving  the  currency,  and 
especially  of  increasing  its  volume;  but  none  of  the  i)ro- 
j)osed  measures  could  command  the  assent  of  l)otli 
branches  of  the  legislature  in  Lower  or  Upper  Canada. 
Thus  matters  drifted  throughout  the  thirties,  until  the 
political  troubles  after  183G  paralyzed  all  proposed  im- 
portant legislation. 

219.  Canadian  currcncij  after  the  union  of  Upper  and 
Lo-u-er  Canada  in  1S4  L— -The  political  crisis  of  1837-40 
diverted  attention  from  the  reform  of  the  monetary 
system  of  the  country,  although  there  was  evident  need 
of  its  being  effecte(L  There  was  great  dearth  of  ca{)ital, 
too,  for  banking  purposes,  as  was  made  evident  by  the 
extension  of  the  term  which  had  been  given  to  certain 
banks  during  which  they  were  obliged  to  secure  fimds 
for  various  stock  issues. 

The  British  authorities  in  1840  advised  the  leifisla- 
turc  of  l"^p{)er  Canada  to  prohibit  the  issue  by  the  banks 
of  notes  of  less  than  £l  each.  This  ad\  ice.  however,  w  as 
ignored  by  the  legislature.  The  need  of  currency  of 
the  smaller  denominations  was  too  apparent.  As  has 
been  explained  the  Halifax  currency  was  purely  an  ar- 
bitrary nionev  of  account.  The  Canadians,  therefore, 
had  sound  enough  reasons  for  retaining  bank  notes  as 
low  as  one  dollar.  The  only  coins  of  nearly  ecjual  value 
to  these  dollar  notes  were  the  Mexican,  Spanish,  and 
South  iVmerican  dollars,  and  those  coined  in  the  United 
States.    In  practice,  Canada  was  dej)endent  for  her  sup- 


li. 


'I 


•  4 

-  i 
I 


III 


>?! 


1st 


MONEY   AND   RANKING 


])Iy  of  silver  coin  upon  the  Pliihuleli)liia  Mint,  and  upon 
iniijortations  Ironi  the   I'nited  Kingdom.     Tlie  pound 
sterhny'  was  onhnarily  rated   at    il    4s.   4.d.  currency. 
In  Ipper  C'aiuuhi  the  IJritisli  shilhng  had  long  passed 
lor  Is.  ;>(].  currency,  while  in  the  lower  province  it  was 
rated  at  hut  Is.  Id.     The  very  close  trade  relations  be- 
tween Canada  and  the  United  States,  and  the  consider- 
al)le  note  circulation  the  Canadian  banks  enjoyed  along 
the  border,  made  it  essential  that  the  monetary  media  of 
the  two  countries  should  be  as  much  alike  as  posoible. 
The  familiarity  of  the  jjcople  with  the  decimal  system, 
and  the  rei)lenishing  of  their  stores  of  specie  with  Ameri- 
can coin,    pointed   to  tlie  eventual  assimilation  of  the 
Canadian  currency  system  to  that  of  the  rnited  States. 
'J-JO.  Ls.stic  of  .short  lime  fi-ovcriDniuf  (Ichcnturcs  in 
7,9;,9.— The  revival  of  trade  alter  the  crisis  o.  18^7  had 
bc(  n  s'  Av   in  bcoiunino-,  hut  by  ISU  there  was  a  very 
.«.;•(  IK  ral  inipi'o\  mu  iit.  and  a  decided  demand   for  new 
capital.     The  movement  t.)ok  the  usual  form  of  economic 
expansion,  although   in  Canada  the  develoi)ment  i\\ou<r 
speculati\  t'  lims  was  carried  io  no  such  extremes  as  in 
the  British  railway  mania.     Shrewd  observers,  however, 
tliought  the  imj)ortations    )f  1SJ.7  excessive,  and  were 
of  the  opinion  that  the  great  increase  of  staple  exjxirts 
would  not  likely  endure.     Their  fon  bodings  ])rove(i  to 
be  only  too  \V(  II    justified.     The  severe  commercial  re- 
action in   l'".iigl;ii!(|   ill   IS  1-7  made  its  cM'ccts  evident  at 
once  in  Canada,  especially  ii.  C;uiada   Kast :  for  it  was 
the  merchants  of  Montreal  and  (^u<  Ixc.  v.hosc  connec- 
tion with   HritaMi  was  closest  bv  reason  of  their  domi- 
nance in  the  export  trade,  who  first  felt  the  blo,>-.    There 
were  a  great  number  of  commercial  failures;  a  great 
r-Uing  off  in  the  export  trade,  csp^  -nilly  ii:  ^hipmcnt^ 
of  timber,  wheat  and  produce;  a  heavy  reduction  of  dis- 


HISTOKV  OF  CAXADIAX   M()M:TA}{V  SVRTF.M       1S5 


nil  lilts  made  by  the  banks,  and  a  sharp  contraction  in 
tlitir  circnhition. 

So  <4reat  was  the  f^overnnient's  need  in  181.8,  and  so 
hopeless  the  prospect  of  borrowino-  money  in  Kn<4land, 
tliat  resort  was  made  to  an  issne  of  debentures.  l)earinir 
interest  at  ('»  per  cent.  Tliey  were  of  the  form  and  ap- 
|)(aranee  of  bank  notes  and  were  issued  for  sums  as  low 
.IS  $10,  were  payable  in  one  year  with  interest,  and  made 
leeeivable  for  jjublic  dues.  A  ste})  not  contemplated 
hy  the  act  was  the  re-issue  of  the  j)ai)er  after  it  had 
\kv\]  paid  into  the  i)ublic  eliest.  A  total  issue  of  £12.).- 
{100  was  authorized.  In  the  foilowinn-  year  the  <iovern- 
iiicnt  obtained  authority  for  a  new  issue,  in  debentures 
for  less  than  tlO  each,  payable  on  demand  or  after  a 
tixed  date  which  the  <4-overnment  mi^ht  set,  with  or 
\\ithout  interest.  As  it  happened,  the  authority  thus 
f^ranted  was  not  used,  .and  the  debentures  of  1848  soon 
(iisap])eare(l  from  circulation. 

•J"J1.  Crisis  of  /SoT. — Trade  revived  a^»'ain  in  the  early 
lifties.  until  by  18.)7  there  was  a  veritable  boom  in 
tiade  and  commercial  affairs.  .Much  of  this  meant 
vtimd  and  lasting-  progress,  but  there  was  also  along 
with  it  wild  s|)eculation  in  l;ind.  Hut  in  1H.')7  the  har- 
\est  was  a  virtual  failiu'e:  and  added  to  this,  urain  ])rices 
were  low.  Then,  to  make  matters  worse,  came  the  finan- 
(ial  crisis  in  (ireat  Hritain  and  also  the  I'nited  .States, 
riie  Canadian  banks  had  extetided  loajis  to  Ijorrowcrs 
piincipally  ihiouuh  note  issues.  'I'hey  w<re  now  cori- 
Ironted  with  demands  for  note  r((l(  inplion:  and.  there- 
!'>re.  .'is  a  measure  ol'  safety  .'ind  nr<(>auti(in  curtMiled 
their  discounts.  Within  the  veur  their  circulation  had 
fallen  to  two-thirds  its  volume  in  18.")r);  juid  discounts 
nere  cut  down  in  corrcspondiiiM'  decree.  ,\l  once  there 
.ircKse  u  demand   from  both   the  tradinj'-  and   the  a<n-i- 


ISO 


MONEY   AM)    IJANKIVG 


cultural  classes  that  the  ^rovernnieut  should  furnish  a 
circuiatino-  niediuni  of  e.\chan<^e,  since  the  banks  refused 
to  meet  the  denia.  ds  made  upon  them.  The  banks 
were  simj)iy  safe^iiarditi^j-  their  own  interests  in  ado])t- 
in<r  tiiis  eo"servative  policy:  l)ut  there  was  no  doubt  that 
the  sudden  and  violent  contraction  of  a  <Treat  part  of 
the  circnlatino-  medium  of  the  })e(,j)le  did  seriously  in- 
jure the  industries  and  trade  of  tlie  colony.  IJut  it 
was  not  until  IHCO  that  a  scheme  |)ro\idin^'  for  govern- 
ment note  issue  was  seriously  considered. 

'2'2'2.  Karl  11  al  Ion  pis  at  i^ovcniDwnl  note  issuer.— It 
was  in  this  year  'IH.jT)  that  legislation  was  prssed. 
bec.<minw'  effective  January  1.  18.58,  whereby  I  lifax 
cunvncy  ceased  altogether  to  be  the  ofHcial  or  statutory 
m'Miey  of  account.  Thereafter  Canadians  reckoned  in 
dollars  and  cents,  the  decimal  systi'in  of  ciu-rcncy  l)ein<,' 
adopted.  This,  of  coiu'se.  \vas  simply  takiny-  formal  ac- 
count in  law  (.f  what  had  \kvu  done  for  years  as  a 
fact.  The  Hritish  .so\  creiyii  was  continued  as  le^'al  teii- 
dci-  for  S4.8(),-;.  and  the  American  ea^lc  as  coined  after 
18.'}!  was  made  le^al  tender  for  SIO. 

'2'2:i.  Mr.  Cinlfs  pJnu.-  In  18t;o  Mr.  A.  T.  (ialt.  the 
(inanci-  minister,  devised  a  remedv  wliich  he  thonjjht 
uonI<l  cure  the  monetary  ills  of  the  countrv.  Ills  plan 
was  "to  separate  ciiiri  iiey  IVom  banking";  his  purpose, 
"to  J)k'  tli(  i-nrreliey  of  the  country  on  a  perfecllv  :,ui'c 
and  salV'  fooijuM-  |,y  separaiing  li  IV:)m  the  banking 
interests,  and  by  removing'  it  from  the  possible  sus|)icioii 
of  Ining  all'icttd  by  political  exigency."  \\r  pro])oscd. 
therefi-re.  that  no  paj)er  money  be  issued  except  in  the 
credit  of  the  |)rovince:  and  sicondly.  thai  such  notes 
of  the  provinc<-  should  be  a  legal  lender  and  rede(  niable 
in  s|)ccii .  iii  v\..ijio  ii\  {lit*  tnnximum  Issue  at  >^n>,- 
0(M),()0(».  ;ind  ha\e  the  notes  jint  into  eirenlat  ion  by  the 
banks;    the  notes  could  be  obtained  bv  lb<  ni  from  llu 


HISTORY  OF  fAXADIAX  MONETARY  SYSTEM      1«7 


Treasury  on  deli  very  of  one-fifth  the  amount  of  the 
notes  in  speeie,  one-tiftii  in  o()\;ernment  securities,  and 
i)y  ^ivin<jf  a  ])rivile<^ed  hen  upon  their  assets  for  the 
other  tliree-fifths.  The  banks  would  pay  the  govern- 
ment for  the  privile'i'e  of  eireula^^^i'fif  notes  up  to  half 
their  paid-up  eapital  stock,  at  the  rate  of  8  per  cent  ])er 
aiHiuni:  and  for  notes  in  excess  of  half  their  eapital  at 
the  rate  of  4  i)er  cent.  S])ecie  and  securities  so  received 
the  Treasury  was  to  jiold  as  a  reserve  ao-ainst  the 
notes.  Needless  to  say,  none  of  the  chartered  hanks 
slunved  any  eagerness  to  exchange  a  franchise  to  issue 
notes  at  no  cost  beyond  that  of  ])rinting  them,  for  a 
right  that  would  cost  tluin  3  i)er  cent  on  i)art:  of  the 
notes  taken  out,  as  well  as  the  current  rates  for  the  specie 
de])osited  and  for  the  cash  ])aid  for  debentures  with 
which  they  were  to  piotect  two-fifths  of  their  circulation. 
So,  iu  the  face  of  liostile  criticism  from  all  sides,  the 
govirnment  withdrew  the  measure. 

'2'2i.  Pnniticial  iiolt'  issues.-  In  18(')().  however,  the 
))lan  was  once  more  brought  to  the  front.  'I"he  floating 
debt  of  the  piovinct'  alone  amounted  tt)  ov(  r  .*^.").()()0.()()(). 
Of  this.  >>•_».•_'.")().()()()  was  owing  to  one  bank,  and  that 
bauk  was  pressing  for  payment.  The  legislature,  in  an 
altemi)t  to  secure  funds,  finally  pa^sed  an  act  in  this 
vear.  which  authori/ed  the  issue  of  not  more  than 
.^H.(M)().()(M)  in  ;'rovincial  notes:  tluy  were  made  ])ayable 
on  demand  in  specie,  cither  at  Toronto  or  Monti-e;d.  as 
the  notes  mitiht  be  dated.  Tbev  w.vc  a  fiill  leg.il  tender 
except  ;il  tliese  Iwoolliees.  Tlie  go\(rno|--in-couneil  was 
authorized  to  ni;ik(  ari'angements  with  an\  ban!^.  tliat  so 
wished,  to  surrendt  r  its  right  of  noti'  issue;  such  hank, 
however,  retaining  the  right  to  icsume  its  issue  privi- 
leg-es  upon  gi\  ing  three  months'  notice. 

N'arious   inducements   were  oll'ered   the  l)anks   to   g(  t 
IIkui  to  vacate  the  lield,  in  tills  particular,  in  favor  of 


fi 


w 


1  » 


I  .,,_4- 


188 


MONEY    AM)   BANKIXG 


li- 


the governnifiit.     Ilowtvtr.  only  one   institution— the 
IJank   of   Montreal    -pro\e(l    willin--'   evtn   temporarily 
to  surreFider  the  rioht  ol'  note  issue,  and  to  undertake 
the  eirculation  of  piovincial  notes.     The  provineial  note 
issue  was.  foi-  the  time  bein^y".  the  liank  of  Montreal's 
favorite  seheme:    for.  so  far  as  this  particular  bank  was 
eoneerned.  the  first  ed'eet  of  the  measure  was  to  li(iuidate 
Mliat   had    bcni   a   distinetly    inactive   asset.     This   was 
done  by  convert in«r  tlie  loans  which  the  bank  had  made 
to  the  i)r()\  ince,  and  its  investments  in  ^•overnment  de- 
bentures, into  |)rovincial  notes  a\ailablc  for  use  in  any 
kind  of  excliannc.      It  was  provided  in  the  act  that  to 
such  banks  as  suri'endcred  tiieir  riyht  to  issue  notes,  and 
w  ho  withdrew  their  notes  from  circulate-'  with.in  a  year, 
compensation  would   be  i)ai(h  until  tlu         );ry  of  their 
charters,  at  a  rate  not  to  exceed  .■>  ]ht  cent  per  amuim 
upon  (lie  nmoiint  of  tiieir  eirculation  on  A])ril  ;J0,  18GG. 
A  commission  of  one-(|nai-ter  of   1    per  cent  was  to  be 
paid    every    three    months    to    each    bank    circulatinir 
provhicial  paper  instead  of  its  own.     Hanks  relincjuisli^ 
inu-   issue   ))ri\  iien-ts    wxw    fui'lher  exempted    from    the 
obliu-ation  to  hold  one-tenth  of  their  paid-up  capital  in 
l)rovincial  (h  1  .  ntures.  and  were  permitted  to  exchanu-e 
such  (hbeiiiuics  at   |)ar  for  pro\  incial  notes. 

Tile  LfoNciiiment.  on  the  other  hand,  was  to  hold  a 
reserve  of  -JO  per  emt  in  specie,  against  its  leoal  tenders, 
for  the  aiiioiinl  in  circulation  up  to  s.""».(M)().()()();  and 
aoainsl  amounts  in  excess  of  tiiat  sum  •_•.->  per  ecnl  in 
specie  until  the  whole  ;!uthori/((l  issue  of  SH.OOO.OOO  was 
i-cachtd.  Co\er  of  piovineia!  debentures  to  the  full 
amount  was  rc(|uired  for  the  di.'lerence  between  .specie 
reserves  and  notes  ontstanchnu-. 

It  has  .sei  unci  will  wniiji  wiiij,  to  (spjain  t!iis  system 
somewhat  in  d(  tail:  for  while  no  banlv,  sa\e  the  one  al- 
ready niditioned,  accepted  the  oHVi  of  the  i^ovi  rmiK  nt. 


HISTORY  OF  {'AXADLW   MONETARY  SYSTEM!       ISO 


yet  the  sclienie  w".s  an  important  one.  In  essence,  it 
involved  the  principles  since  ac'opted  m  issuing-  Domin- 
ion Government  notes.  These  were  issned  alter  the 
confederation  of  ISC.T.  Allhon^'h  the  terms  of  these  is- 
sues have  been  modiiied  from  time  to  time,  yet  tiie  un<ler- 
lyin^r  principles  have  always  been  tlie  same;  tlierefore, 
they  may  he  very  easily  and  l)rielly  described. 

•J2.).  Dominion  notes  for  IxinJyntii-  reserves. — In  18(58 
an  act  was  ])asse(l  declariri''-  tlic  ])n)vincial  notes  of  IHCO 
to  be  Domim'on  notes  for  w  hich  the  Dominion  alone  was 
to  be  Jield  responsit)le:  and,  further,  continuing  the  i)ro- 
visions  first  enacted  in  respect  of  this  issue.  Authority 
Mas  o'iven.  also,  for  the  estahlisliment  of  branches  of  the 
iveeiver-^enerars  department  in  Mont.eal,  Toronto, 
Halifax  and  St.  John,  for  the  issue  and  re(lem{)tion  of 
Dominion  notes.  Tntil  the  i.iiification  of  the  curren- 
cies of  the  vai-ious  provinces,  note^  ])ayable  in  Halifax 
were  to  be  issued  at  the  rate  of  S.>  the  pound  sterlin<,^ 
and  were  to  be  le^^^al  tender  only  in  \ova  Scotia  (.'U 
\'ict.,  c.  Kl). 

In  the  revision  of  the  bank  act  in  1S70  i:V^  Vict.,  c.  1 1 ) 
it  was  i)rovided  that  each  bank  shouhl  hokl  usually  half, 
and  never  less  thai»  one-Miird.  of  its  cash  reserxe  in  Do- 
minion notes.  In  s<.  far  as  such  notes  held  by  Ww  banks 
were  not  covered  by  specie,  the  pro\  ision  nierelv  meant 
a  foi-ced  loan  without  int(  rc^l  to  tlu'  novcrtimcnt.  Sir 
I'rancis  Ilinck.s.  who  was  tluii  linance  minister,  to  all 
objections  merely  replied  lliat  be  was  oblined  "to  con- 
tend in  the  interests  of  the  public  at  laru-e  that  they 
were  entitk'd  to  some  share  in  the  j)roiits  of  lireulation." 
This  j)oliey,  sulijected  to  mudi  criticism  then  as  now, 
has  !)een  maintained  to  the  present  day. 

Sir  i'rancis  llincks,  by  ji  finlher  act  (.'{.'{  \'i(t..  e.  !») 
considerably  enlar^i'd  the  yenend  circidation  of  D(»min- 
lon  notes  Iiy  caneeliii'4'  tin    pnvik^^e  of  larger  issues  than 


f 


-\ 


190 


MONKV   AM)    15A\KIN(; 


$t  l)y  tlic  l)aiik.s.  The  ai-raiioenicnl  iV,!-  isMic  and  rc- 
(lcn)])ti()ii  l)y  one  of  the  chartered  hanks,  in  f'(»ree  since 
18()(),  was  l)n)u<iht  to  an  end;  and  the  nianafifement  of 
the  <rovcninient  cii'cuhition  tnnied  (ner  to  otKcers  of  tlie 
^oveninient.  OfHces  of  issne  and  redemption  branches 
of  the  receiver-f'-enerars  (lej)art?iient  were  oj.ened  in  the 
provnieia!  caj)itals.  ^Vnthority  was  ^/wcn  to  increase  the 
wliole  issue,  hy  not  more  tlian  a  miJHon  at  a  time,  at 
intervals  of  not  k'ss  than  three  months,  to  the  total  of 
.$(),0()0,(K)().  iV^ainst  tlie  circukition  outstaiuhn^.  the  re- 
cciver-fTcneral  was  ol)h<.ed  to  hold  s|)eeie  and  Dominion 
del)entui'es.  The  del)entnres  were  not  to  exceed  80  per 
cent  of  the  circulation:  and  ihe  specie,  as  a  rule,  was  to 
cfjual  •_>.)  pel-  cent  of  the  debentures  (20  per  cent  of  the 
circnlalion  ).  and  was  never  to  l)e  less  than  1.)  per  cent. 
Issues  in  excess  of  so.ooo.ooo  were  to  be  covered  bv 
specie,  dollar  for  d(.llar,  and  of  notes  so  covered  tlie 
issue  to  any  (juantity  necessary  mioht  be  undertaken. 

•22G.  Later  h^ishilion  mnrcniin;^-  Dominion  notes. — 
This  measure  'to  regulate  the  issue  of  Dominion  notes" 
was  intended  to  rejjroduce  that  |)art  of  Peel's  act  of 
1S41.  which  established  a?i  issue  department  in  the  Hank 
of  KtiM-land.  Sir  Francis  Ilincks  believed  that  'the 
functions  of  the  issue  (le|)artment  should  be  automati- 
cally confined  to  the  exchange  of  oold  for  notes  and 
vice  versa:  that  an  amount  can  be  established  that  way. 
with  pciieet  safety,  to  be  issued  upon  public  securities, 
and  all   beyond   that    fixed  amount,   in   u(,i,|;' 

In  1H7-'.  till'  government  beini;  in  need  of  funds,  it  M-as 
provi.lrd  (.-{.J  \'ict..  (•  7!  that  excess  of  issue  over 
JfD.OOO.OOO  miu-ht  be  permitted  ai-ainst  -rold  holdin"-s  n\' 
hut  3.5  per  cent,  'i'he  Liberals,  who  came  into  power  in 
i:-^!").  chauired  tjiis  renuiation  {HH  \iet..  c.  .5)  to  .)()  per 
•'•■"<  i"  ,U'»M  l''>r  the  amounts  outstandiny-  between 
5f<J>.0(M).()()()  and  sr.'.uoo.ouo  .ni,|  ,|ol!:,r  for  dollar  a<.ainst 


[ilSTORY  OF  CAXADIAN    MOXETARV  SYSTKM      1!»1 


circulation  in  excess  of  .'^TJ.OOO.OOO.  .\,s  the  Dominioii 
(Xjijuuled,  additional  branch  oflices  of  the  vecei\er -i^en- 
( lal's  department  were  oj)ened  in  the  other  prox  niees. 
Ill  1 880  the  limit  of  issue  against  specie  and  debentures 
was  extended  to  .$'J().0()().()0().  and  the  specie  reserve  re- 
(|iiired  a<^ainst  anything-  U-ss  than  that  sum  reduced  to 
].")  per  cent;  wnile.  in  addition.  10  jjir  cent  of  the 
s-_'().000.000  was  to  be  co\  ered  by  del.ientures  of  the  Do- 
minion guaranteed  oy  the  government  of  the  Fnited 
Kingdom  ( 4.'J  \'ict.,  e.  l.*}).  Thirteen  years  later  an 
,i(t  was  |)asse(l  (.'{  Kdw.  ^'II.  c.  Ui)  which  raised  the 
amount  which  \vas  to  be  but  partly  co\e!'ed  in  gold  and 
Dominion  debentures  to  .'<:JO.O()0.0()0.  In  late  years  the 
Dominion  goveinment  has  held  a  very  large  amount  of 
Ui'ld  as  security  for  the  circulation  in  excess  of 
s.SO.OOO.OOO.  The  circulation  of  the  notes  has  expanded 
\\  ith  the  demand  for  them  bv  the  banks,  thev  having  been 
ii(|uired  by  law  to  hold  40  j)er  cent  of  their  reserves  in 
Dominion  go\'ernment  notes.  The  problems  arising 
from  this  will.  howe\ei-.  be  fullv  discussed  in  Chap- 
ter XX  XI. 

227.  lii'siill  (,f  Sir  rrancis  Ilinchs  Ic-'.slatmn.— The 
Kgislation  which  was  cai-ried  by  Sir  l-'raneis  Tlincks 
lias  resulted  in  gi\  ing  the  Canadian  Treasury  some 
small  j)rofit  in  its  note  issues.  Tluvse  notes  have  been 
issued  in  the  I'nilowing  denominations:  25  cents.  $1,  $2, 
>^K  $5,  $.')0.  J^IOO.  s.)00.  si.ooo  and  $.).000.  The  banks 
are  not  jiermilled  to  issue  notes  for  less  than  ><.'),  but  the 
fi<l(l  ai)ove  thai  sum  has  been  \  irtuallv  liTt  to  them,  the 
larger  Dominion  issnis  Ik  ing  usid  inalnK-  as  part  of 
Mie  banks'  reserves  and  i'or  cleai'iiig-house  settlements. 
As  a  result,  since  confederal  ion.  Canada  has  affoivlcd 
the  rather  uni(|ue  i\amj)lc  of  eonilicting  theories  and 
jM'inciples  operating  side  by  sidi  —  those,  namely,  of  the 
hanking  and  currencv  schools. 


..'il 


192 


:\ro\F,v  AM)  n.wKixG 


if) 


228.   Uniform  cum  nc//  in  ('(tinidd.—  ln  1871  tlie  fed- 
eral j)arliar)K'iit  j)a.s.se(l  an  act  (.*U  \'ict..  c.  -1)  re.spectitin' 
tlie  eiirreiu-y,  wliieli   <>ave  lo  eaeli  province  of  the  Do- 
minion a  nniforni   system.     The  sinn-le   .rold   standard 
Mas  then  adopted,  hein^'-  that  of  the  British  sovereign  of 
the  weight  and  fineness  ])i-escrihed  hy  the  laws  of  tlic 
T/nited   Kingdom.     The  sovereign  consists  of  12.'J.271. 
grains  of  stanihird,  or  1I,'3.()()1  grains  of  pure  gold,  the 
slandai'd  gold  oi' (ireat  Britain  l)eing  DKJ.OOH  fine.     It 
was    enacted    also    that    the  gold  eagle  of  the  United 
States  shonld   he  legal  tender  in  Canada.     The  eagle 
contains  2;J2.2  grains  of  pnre  gold.     Silver  coins  were 
made  a  legal  tender  nj)  to  SIO,  and  co])per  coins  up  to 
2.}  cents.    Thus  liritish  sovereigns,  American  eagles,  and 
Dominion  government  notes  formed  at  first  tlie  only  full 
legal-tender  mone> .      Bnt    in    1!)12    Canadian   $.5   and 
•^10  gold  pieces  were  added;  the  act  of  1871  stipulating 
that  Canada  shonld   have  a   gold  coinage  of  her  own 
when  desired.     The  Canadian  SK)  piece  is  of  the  same 
weight  and  fineness  as  the  iVmerican  eagle.     It  was  not 
until  i;)()8  that  a  hranch  of  the  ]{oyal  Mint  was  estah- 
lished  at  Ottawa,  where  Canadian  copper,  silver  and 
gold  coins  are  now  nn'nted. 

There  ne\er  has  JR-en  any  silver  (jnestion  in  Canada. 
The  act  of  1871  estahlished  an  niuiuestioned  gold  stand- 
ard. As  the  Canadian  hanks  have  furnished  the  country 
with  a  safe  and  elastic  medium  of  exdiange  there  has 
hirn  suflicient  currency  to  meet  the  needs  of  the  people. 
A  good  deal  of  jealousy,  however,  has  heen  shown  to- 
ward the  jx.wcr  of  the  chartered  hanks  to  furnish  a  paj)er 
medium  of  exchange  to  the  people.  Many  have  in- 
sisted that  the  issuing  of  paper  money  sjiould  Ix.-  the 
govenitiienrs  sole  prerogativ<'.  Tliis  prolilem,  iiowever, 
^vill  he  dealt  with  in  Chajjter  XXXII. 


PART  II:     HANKIXG 


C  II  APT KU  XII 


XATL'HK  Ol'  (in: I) IT 


•220.  Griffin  and  Linds  of  crcdils. —  A  ci-edit  is  a  de- 
Icrrcd  or  jXJstpoiR'd  jjayiiRrit  of  rii<iiKV.  It  always 
itj)reseiits  a  pi-oniise,  ex|)irss  or  implied,  to  pay  a  certain 
imniber  of  dollars  at  some  time,  definite  oi-  iiidetinite. 
IiiasniiK'h  as  it  is  a  promise  to  j)ay  money,  certain 
forms  of  it  circulate  in  lieu  of  money,  the  ease  and 
extent  of  this  cii-culation  de])endin<>'  dii-ectly  upon  the 
intc^-rity  and  ability  to  pay  (>f  the  maker  of  the  credit, 
and  the  date  and  conditions  of  ])aynient. 

Credits  come  into  existence  always  as  the  result  of  an 
I'xchange,  either  the  exchanne  of  credit  for  ^yoods, 
v'iedit  for  money,  or  ux'dit  for  ci'edit.  I  f  A  pui-chases 
ydods  from  li,  ho  Tuay  tendi'r  in  payment  either  ^'old, 
liis  j)ersonal  check,  l)atik  notes.  I'nited  States  notes  oi- 
his  own  ])ronn'se  to  pay  in  sixty  days.  If  the  payment 
is  made  in  yold.  no  credit  operation  is  imohcd.  If 
iiii'de  by  check  or  in  l)ank  notes,  it  repi'csents  merelv  a 
ti'anslei'  '  .''  credit  already  eicated  by  the  bank.  If 
made  m  I'nited  Statts  'otes  it  is  likewise  a  tia.nsfer  of 
cicdit,  this  time  of  (io\  trnnienl  credit.  If  ])a\-ment  is 
made  by  his  own  promissorv  note.  howfM-ri\  ■(  new  ci'edit, 
pa}'able  at  a  <lefinite  time,  is  created. 

Credit  is  of  two  kinds  noii-cireiilatino'  and  circulat- 
ing'. r\on-circuialin^'  credit  accompiishes  one  ex- 
chano'e  while  circulatino-  ere'dit  accom])lishes  man\ .      In 


VJi 


.mum:v  AM)  i;a\kin(; 


tlic  case  a'Dove  iT  A  pays  witli  a  promissory  note,  ;iM 
c'Xfhan^'c  has  been  made  l)y  nieaiis  of  the  credit  tluis 
cieatcd.  Al  tlie  end  of  sixty  days,  however,  the  crecht 
must  he  H<|ui(hited.  hy  means  of  cash,  if  it  has  not  Ihti; 
•  •iincelled  hy  an  e\chan,m'  of  properly  in  the  opposite 
direction.  The  cre(ht  which  serxed  as  a  me(hiim  of  e\- 
ehany'(  in  the  ih-st  transaction  must  itself  he  ixchanired 
for  cash  at  matui-ity.  and  the  whole  transaction  amounts 
in  the  end  to  an  exchange  of  n-oods  for  cash  exten(hn'>- 
over  a  period  of  sixty  (hiys. 

2.'J().  f'.sc  (if  crcdil  in  indiislr//.  -l^udvr  our  capital- 
istic systini  of  imhistiy  e\ei-y  enterprise  i-ecpn'res  cap- 
ital The  cutnprcuciir  must  ha\e  hnil(hn<^s.  land,  ma- 
chinery— a  ^reat  variety  of  capital  <^-oo(l.s  which  make 
up  the  plant  and  e(iuipment  of  the  linsincss — and  he 
must  ha\e  the  ser\ices  of  employes  and  raw  matei'ials. 
Jle  must  prej)are  for  the  \ai'ious  expenses  of  the  busi- 
ness— wanes,  taxes,  etc.  If  he  is  not  a  capitalist  him- 
self and  cannot  induce  ca})italists  to  share  with  him  the 
risks  and  profits  of  his  business,  he  must  borrow  this 
property  t'roTU  otiiers,  i\il  these  ()b]i<>-ations  arc  credits 
and  must  sometime  he  li<iuidated  by  the  payment  of 
cash. 

The  form  whicli  these  credits  will  take  will  be  deter- 
mined lar^rcly  by  the  nature  of  the  business,  the  sa<racity 
of  the  fiiircprciinir  himself  and  the  condition  of  the 
credit  market.  We  have  seen  that  credits  vary  in  re- 
sjH'ct  to  time  and  conditions  of  ])aymcnt.  Most  nilrc- 
pnnciirs  arc  capitalists  to  a  certain  extent,  their  demand 
for  credit  arising'  from  the  \'i[v\  that  thev  expect  to 
cnlarfT'e  their  business  by  supplementin.tr  their  ca))ital. 
Let  us  suj)posc  that  a  manufacturer  owns  outritjht  his 
la?i(ls.  factory  and  machinery,  and  in  addition  has  a 
v.orkin<r  capital  sufTicicnt   to  meet  his  payrolls  and  ex- 


'^iS 


N.MTUi;  ()!•  (  KI.DIT 


195 


HI  uses  lor  some  liiiii'  to  coiir'.  lie  lias  also  a  slock  of 
liiiisliKi  ])i-o(lucl  on  hand,  tiic  market  for  which  is  sca- 
-niial  and  which  anioutits  to  only  one-half  the  jjroduct 
v\liich  he  e.\|)i'cts  to  market,  or  jxi-liaps  has  contracted 
to  deliver  when  the  season  comes.  ()h\  ionsly  he  must 
li;i\c  more  raw  material,  and  if  he  cannot  jjnrchasc  it  on 
eiedit.  he  will  i-o  to  his  hanker,  make  a  complete  state- 
ment of  his  condition,  and  if  it  is  satisfactory,  <rive  to 
the  bank  his  {)romissory  note  maturin^r  at  a  date  when 
he  will  have  marketed  his  prodnct.  In  return  for  this 
he  will  receive  a  credit  on  the  hank's  hooks,  which  will 
enal)lc  him  to  purchase  the  desired  material. 

•2:i\.  Function  of  comincrcial  baiih'ing.—Th\s  is  the 
^ireat  function  of  commercial  hankin<r,  to  enable  manu- 
facturers and  merchants  to  enlar^re  their  Jnisiness  bv 
e\tendin<r  to  them  for  short  periods  the  use  of  credit 
h\  which  they  can  carry  ooods  from  the  time  of  pur- 
•  liase  to  that  of  sale.  The  readiness  with  which  credit 
will  be  o-ranted  depends  upon  the  reputation  of  the 
iiKHiufacturer  or  merchant  for  sellin^r  his  product,  the 
■iniount  ol'  credit  asked  for  and  upon  the  nature  of  the 
Inisiness.  In  dull  times  not  every  commodity  will  sell. 
}et  upon  the  proceeds  of  the  sale  depends  the  redemp- 
tion of  the  credit.  Therefore  those  who  deal  in  articles 
^y\m^h  are  always  reasonably  sure  to  sell,  such  as  food 
products,  clothing-  and  in  oeneral  the  necessities  of  life, 
ne  the  most  certain  to  obtain  credit  and  in  the  larf^est 
I  mounts  relative  to  their  ca})ital  investment.  Heputa- 
llon  for  sellin,ir.  however,  is  a  on-at  factr)r,  and  credit 
1^  often  extended  on  this  account  even  to  those  whose 

product  is.  (Tcnerallv  speakiny-.  not  apt  to  be  quicklv 
,,.,,,       f:i,i,,.  '      •  ^         • 

It  may  be.  however,  that  the  entrcjucncnr  after  reach- 


r 

I' 


ui<T  the  limit  of  his  own  resnurces. 


will  i^refer  to  add 


I'.Ki 


\l()\l,^     AM)    HAM\i\(. 


pL'i'iiiaiKiitly  lo  his  \'  orkiii;^'  capital  instead  of  iiuTcasiiijr 
and  dccrcasiii;^-  it  as  liis  Imsiiifss  dfinatids.  It  i  lay  lie 
that  tlu'  nature  of  liis  l)nsinrss  is  sufli  that  he  linds  it 
(litHcult  to  ol)lain  ci'i'tht  in  (hill  tiuics.  Kxtii  in  pros- 
l)crons  limes  he  may  feel  that  a  yiMieral  contraction  of 
credits  is  due.  and  that  he  may  lie  unahle  to  market  his 
product  to  meet  his  ohli<^'ations.  If  such  is  the  case,  he 
may  add  to  his  woi-kinn'  ea|)ital  hy  hori'ow  in<^'  for  a  ion^^ 
peiiixl.  placiny'  a  mort<4au'c  upon  his  i-eal  property. 

23'2.  Mort  1^(1  ill's  (111(1  bonds. -^  A  mortu'a^'c  is  a  secured 
credit,  that  is,  seeuivd  hy  the  |)led^e  of  specific  pro|)- 
ertv.  The  most  common  foi'in  in  which  this  kind  of 
credit  is  used,  is  that  of  l)onds.  A  liond  is  a  portion  or 
fiaction  of  a  mort^an'c.  When  mort^'a<4"es  are  so  lar^e 
in  amount  that  in  theii-  entirety  they  cannot  find  a  mar- 
ket with  any  one  indi\idual  or  institution,  they  • 
di\  ided  into  parts,  called  honds.  for  distrihution.  T; 
credit  must  he  redeemed,  of  course,  at  its  maturity  ,nist 
like  the  shoi't-time  civdit,  hut  the  matui'ity  is  usually  far 
enou^di  distant  to  ^'ive  ':\'r  u'rcjiri'rnr  an  opportunity 
of  mcctin<Ji'  it  out  of  his  accumidated  ])rotits.  Moreover 
if  the  pr(<perty  which  secures  it  has  not  dei)i'eciated  in 
the  meantime,  it  can  often  he  renewed  at  matui'ity. 

This  foi'ni  of  ci-edit  is  ordinai'ily  used  when  the  pro- 
ceeds of  the  loan  are  to  he  used  for  some  fixed  or  per- 
manent investment.  Tims  it  is  the  form  commonly  used 
hy  railroads,  puhlic  service  corjjorations,  lar<4"e  industrial 
corporations  ownintj'  xaluahle  real  ])ro|)ei'ty.  and  the 
like.  The  interest  on  the  honds  is  paid  out  of  the  sav- 
inns  of  ijie  coi'poraiion.  and  when  ihey  mature  the 
pi'ineipal  is  paid  hy  the  sale  of  new  secui'ities, 

I'.V.i.  Erdmnic  of'iimhcr  huhtsirii.  There  are  cer- 
tain industi'ies.  howevei'.  in  which  hoth  these  methods  of 
obtaining  credit  are  used.      A  good  example  is  the  luni- 


NA'I  TKi:  ()|^  Cin.DIT 


197 


I"!-  liidiistiy.  we  havr  seen  that  llic  nurclianl  and 
iiiaiiiit'aiiiii-i'v  of  iiuickly  coiixrrt ihic  pi-odiicts  will  ordi- 
iKiiily  horrow  coiniiKTcially  and  lliat  railroads  and  sim- 
ilar c'oi-por;  ;ions  will  1)oito\v  on  lono-tinK'  ol)ii<>alions 
I.  cause  tlic  inorR-y  so  obtained  is  to  Ik-  usid  in  iHTiiianfiit 
in\('stinciil.  and  the  ohliyations  cannot  he  redeemed  e.\- 
(v|)t  hy  reriindinu'.  TIk.  himherman  is  ol'  eourse  a 
iiianuraetui-er  hut  his  proihu-t  is  not  always  ([liiekiv  eon- 
'.'■rtihle.  W'Ik  n  a  ])anie  eomes.  i)eoi)le  must  still  have 
I'ood  and  elothinn-  hut  they  ean  ^et  alony  without  huild- 
in^'  new  jiouses.  'rherel'ore  lumber  is  one  of  the  first 
commodities  to  feel  the  dei)rcssion  throu<>li  u  fallinir 
•  AV  in  demand. 

A  complete  linnhcrinn'  industry  will  own  a  saw  mill, 
a  supi)ly  of  timber  sutlicient  to  last  for  a  number  of 
years,  and  a  (|uantity  of  manufactured  lumbei-  piled  in 
'he  yards  awaitino'  sale.  In  tiiis  country  lumberineii 
e  always  been  lar<^e  borrowers.  'I'he  price  of  lum- 
"  r.  and  the  Aalue  of  timber  land  ha\e  adxanced  steadilv 
\\itli  the  decrease  of  tile  availal)le  supply.  Luml)ermen 
iia\e  been  quick  to  t;;!:-'  'dvanta^^e  of  this  condition,  and 
have  always  been  ea<i'er  to  borrow  to  add  to  their  timber 
holdings.  \\'lien  the  noi-thern  lumbermen  beaan  to  <jo 
south  in  tlie  eiu'hties  they  fourid  that  timber  land  was 
ejieap  and  that  it  couhl  ])e  bouyiit  on  credit,  hence  they 
invested  theii-  capital  in  ecpiities.  That  is.  they  made  a 
first  payment  in  cash,  a.^reeinn'  to  i)ay  an  additional 
amount  eveiy  year  or  as  the  timber  was  cut.  Obvi- 
ously they  must  manufacture  and  mai'ket  lumber  in 
order  to  meet  theii-  objin-ations.  As  soon  as  the  ])roduct 
'.\as  ready  for  sale  it  was  a  '■bankai)le  asset"  because  in 
boom  times  lumber  finds  a  readv  n  kct,  t'oiise- 
(juently  lumbermen  became  hir^'c  commercial  borrow- 
ers, the  amount  of  tlieir  short-time  credit  outstandiny-- 


A 


198 


MOM.V    \\l)  |{A\KI\(; 


often   fxccediiio'   the   valiu'   of  the   inaiiu  factiind   stock 
oil  hand. 

'2liL  Adidtiidiu^cs  of  ti)nl)cr  bondfi. — Sintr  the  yeai' 
r.tOO.  lio\ve\tr,  many  dealers  in  hunher  have  taken  ad 
vauta<^e  of  the  inerease  in  \aiue  of  thtir  tiniher  hinds  to 
retire  their  outstandinn'  notes  and  the  ohh->'ations  thev 
iiuMirred  in  the  original  purehase  of  this  laiuK  hy  issiiinu' 
bonds  seemed  hy  all  their  real  property.  These  bonds 
are  nsiiailv  sei'ial.  a  eei'tain  amount  of  them  matin'ini)' 
e\ery  year  as  the  timber  is  cut.  The  ad\  anta^^v  of  this 
method  of  borrowing  is  obvious.  '. /nl\-  a  fraerion  ol' 
their  indebtedness  nuist  be  met  each  yeai'.  and  thev  know 
lu-fori'hand  just  what  tliat  amount  will  be  and  can  pre- 
paid' for  it.  When  thi'y  borrow  on  short-time  notes 
and  a  panic  occurs,  they  may  tind  it  veiy  ditlicult  either 
to  sell  theii-  product  or  to  renew  their  not*  Almost 
tbeii-  entii-e  indebtednvss  is  likely  to  Ix-omc  due  within 
six  months,  and  if  conditions  do  (.,•  ..nproxc.  there  i> 
Urave  daniici-  of  l)ankruj)ley.  It  is  jjrobable  that  this 
condition  was  lar<4ely  responsible  for  the  bi^'  slump  in 
the  price  of  .Southern  pine  followini^'  the  panic  of  1<M»T. 
'I'liere  was  such  a  yreal  amount  of"  s]u  .-t  liine  lumber 
credits  outstandinu'.  that  tl.^  competition  between  sellers 
became  acute  and  |(rices  declined  vcrv  sharply.  The 
IuuiIh  inien  wliost  liHalions  were  in  tin  form  of  bonds, 
howcvci-,  did  !i.)t  enter  this  (■ompciit ion.  so  did  not  sacri- 
fice either  their  manufactured   product   o|-  their  timber. 

2.'J.").  Iiifitr.st  rali.s  nn  /^o//f/.v,— The  form  which  this 
borrowing'  will  t;,k<',  however,  is  further  inlhienctd  b\ 
the  condition  of  the  cndit  market,  as  evidenced  bv  the 
prevailin;^  ratt  of  inttusi.  The  rate  of  interest  paid 
upon  the  various  kind  'oMM-time  obliuations  is  f.iirly 

wiii  Tixe.i,  .tiiiiwni;/!  li  t  ■  sotii  w  iia  i  wiiii  the  d<nian(i 

or  supply  of  such   iin       i-  'I'lms   railroad    bonds 


\ A'I'I'Ki:  Oi'  (  HKDir 


199 


Uvdv  i'roiu  .*{'  o  j)(.T  cent  to  !•'  ■_•  \Kr  triit  interest:  public 
service  corporation  Konds  tVoni  •!•'•_.  per  cent  to  .')'..  per 
cent  and  industrial  and  I'eal  estate  niort<4a^e  bonds  from 
.")  per  ce!it  to  <!  p"r  cent.  'I'liese  rates  are  fixed  by  tbe 
1(54  a  id  in  which  the  bonds  are  held  by  investors  in  in- 
spect to  security  of  |)rincipal  and  convertibility  into  cash. 
The  rate  at  which  the  commercial  borrowei-  must  dis- 
count his  note,  howevei.  varies  witlun  much  ,ureater 
limits.  It  may  i)e  as  low  as  ,'i  per  cent  when  the  demand 
t'oi'  credit  is  small  and  the  banks  are  ea<»er  to  loan. 
'I'his  condition  is  known  as  '"easy  money."  When  l)usi- 
ness  imi)ro\ts  and  demand  foi'  credit  inci'easrs,  the  rate 
advances  until  in  time  of  panic  it  may  be  as  high  as  10 
or  12  |)er  ctnt.      The  axera^c  is  IVom  i  t')  5  j)er  cent. 

•J.'J<>.  L()ii;i-ti>nc  horro'iciii;:-. —  Naturally  the  <  ntrc- 
prcncur  wishes  to  l)orrow  monev  at  the  lowest  possible 
rate.  Dui-iui^-  periods  of  easy  money  he  is  loath  to  re- 
tire his  short-lime  iudcbtediicss  on  which  he  mav  be 
payin<4'  1  per  cent  i)y  the  issue  of  i)onds  which  will  cost 
iiim  r>  ])(■)•  cent.  .\s  money  hecomcs  ti<4iit.  howexei",  he 
lucomes  anxious  to  make  this  change,  but  often  the  time 
lias  ])assed  when  the  maiket  will  absorb  his  bonds. 
Thus,  in  an  endeaxor  to  obtain  the  lowi'st  rate  at  all 
liiiu's.  thci'c  is  danger  of  his  finding  himself  in  a  tii^ht 
money  juarket  \y\\\\  all  his  obligations  in  short-t imk.' 
lorni.  'I'he  .idxaiitanc  of  |oni»'-timc  borrow  in  j"'  in  ci'r- 
lain  lines  of  indiislrv  is  so  ob\  ions,  howcxci'.  thai  sai_jaci- 
Miis  business  nun  will  often  sell  high-rab'  bonds  wbiii 
the  commercial  ijh  is  much  lowci'.  knowing  that  in  the 
!'>ng  nu!  their  interest  account  \\\\\  .iM'ragc  lo'>  er,  .and 
that  in  case  of  panii"  Iheii-  situation  will  be  much  more 
secure. 

'I'M.  ('r<(/il   I  (■(iiioiiii.i  s   lilt    iisf  o/    i;o/</.— Credit    is 
like  fire — u  good  ser\ant.  but  a  bad  master.     So  long 


jS^P^" 


y  '< 
■if- 


200 


MitM'.V    \\l)  15  \\!<I\(; 


as  it  is  coiiti'ftrud  aini  |)rc\ cntcd  \yi.\\\  siiddrii  contracl- 
tiiin  it  s(i\cs  to  icoiKiiiii/c  the  dm-  oI'  yold.  doiiiu  tli, 
work  of  excliaiiii'iiig  ^oods  nion  riUix  eiiiciitly  lliaii  <4()l(i 
itsc'li".  \\\  lia\e  stvn  tliat  ])ii('rs  drpcnd  iij)oii  tlu 
aiiiomit  of  the  media  ol'  cxcliaii^ui'.  'I'lu  iist'  of  credit, 
tlu'ir''  'ic.  peniiits  Inisiiiess  to  expand  and  trading'  to  lit 
aecelei'ated  witlioiit  a  rednetion  of  pi'ices.  l)nt  on  tin 
otii(  r  hand  iU  nse  destroys  the  eheek  which  otherw  isi 
\\()nld  ])ri\eni  ])iiees  from  i-isin^'  to  an  artitieial  lieinht 
tlnis  hiin;4inu-  on  a  panic.  A  discussion  of  the  etfect 
of  credit  on  piic<>,  ho\ve\ti-.  h(  lon,ys  to  a  later  eha|)ter. 

•J.'iS.  Lii/iii(l/ili(,ii  of  cr('<lil.  We  haxc  seen  that  all 
])ri\ate  ei'i'dits  must  in  the  end  he  jitpiidated  hy  means 
of  casli.  Dnrinu'  a  lime  of  prospi  rity  wlu'n  prices  arc 
lisinu'  and  I'oitnnes  are  htiny'  made  simply  hy  hnyiny 
at  :.  low  pi'ice  and  sclliny-  at  a  higher,  many  people  pur- 
chase property  <tn  ercdit.  usually  i>i\  in,u  the  pioperty 
as  seoui'ity  fo!'  tJK  credit.  The  pi-olits  of  industry  are 
inert  iuL;'.  Ik  nc(  husiness  men  are  stiainin;i'  e^crx 
ner\'e  to  increase  their  husiness,  'I'o  (U)  this  tin  \-  must 
oiitain  cr<-dil.  l-'inllnrmoi'e  at  such  times  hankers  he- 
come  accustomed  to  seeing"  yoods  sold  and  credits 
litjuidated.  and  they  lo;in  moi-e  fi'cily,  'I'Ik  ir  portfolios 
•AW  full  of  lime  credits,  matnrinii  in  the  future,  aetpiired 
in  exchanye  for  (Uiiiand  ciichts  (hie  whenever  called 
for. 

At  such  a  lime  snpp(»se  a  political  or  linaneial  dis- 
turh.nice  sh.ikcs  puhlic  conlidence  in  the  ahility  ot 
dihlors-  especially  l>anl<s — to  meet  their  ohliyations;  a 
demand  for  the  payment  of  such  crcihts  as  ai'c  (hie  is  .s\ire 
lo  f  illow.  Since  the  ohjiyations  of  ;i  hank  arc  always 
du(  and  payahle.  they  ai'c  apt  losun'cra  run."  When 
Ihis  occurs  tiicy  must  liiemselvcs  re(|ucst  paynn  nl  of  nil 
cicdits  thai  air  (luc  them  and  make  praelieally  no  k 


--1^ 


NA'iTiii'  oi   (  i{i:i)ri' 


an 


iK'wals.  Otlici'  huiiUs  follow  Miit.  This  forces  the 
iiK  rcliam  i.  id  niaiiuf'ac-tiirfi-  as  thrir  notes  hccoiiii'  due  to 
sell  their  goods  at  a  saeriiiee,  and  l)el'oie  we  know  it  we 
are  in  the  midst  of  a  financial  |)anie. 

•J.'JJ).  Cow  nirrcidi  iKi/nr  houses  mid  I  he  en  (Jit  .sitiin- 
tioii. — The  (hinder  of  this  condition  has  been  soinewliat 
augmented  l)y  the  custom  of  large  borrowers  discount- 
ing their  notes  through  commei-cial  paper  houses. 
While  this  is  more  necessary  on  account  of  the  proi'iss 
of  consolidation  which  has  gone  on  in  industry  in  the 
last  decade,  it  ne\  irtheless  injects  info  the  situation  a 
lurther  element  of  danger.  l-'<M'merly  the  merchant 
lioi'i'owed  fi'om  his  own  bank  direct,  oi*  if  his  business 
was  large,  from  two  or  three  banks  in  his  own  city. 
lie  knew  the  bankers  pei-sonally,  and  kept  an  account 
;it  eai'h  bank,  'i'hey  were  anxious  to  sei"\  e  him.  and 
woidd  do  so  it'  possil)le.  e\cn  in  ca^'  of  a  panic  ^lence 
hi,  chances  cf  renewing  his  maturing  notes  ai  such 
times  were  good. 

With  consolidation,  however.  a?id  the  growth  of  large 
industries  came  the  necessity  of  .'reased  credit. 
Many  industries  are  now  so  laige  that  the  l)anks  ol'  one 
city  cannot  jxtssibly  finance  Iheii'  boi-i'owing.  Hence 
the  necessity  ot'  a  noteljroker  or  commercial  |)aper 
house,  whose  function  is  to  distril)ute  the  notes  ol' 
\aiMous  eoncei'iis  throughout  the  i)anks  of  the  cjitire 
eoiinti'y.  Xo  doubt  it  is  a  necessary  de\  tloj)ement  of 
the  era  of  consolidation  but  it  destroys  the  jxrsonal 
I  lenient  ol"  banking.  The  b.mker  in  Kansas  has  no  per- 
sonal interest  in  the  success  or  fallni'e  of  the  \ew  ^'ork 
nicreliant  whose  note  he  holds,  beyond  the  payment  ot 
that  particular  note,  and  in  times  of  |)anic  he  is  (piick 
to  re(|uest  \aiuai)ie  payment.  i  he  aitiiity  to  i»orrow  at 
a  large  number  of  banks  is  an  asset  ihiring  prosperous 


^IWl 


.M()M:V    AM)   H.WKlMi 


W 


times;  luil   if  ()\ei--r\ei('isf<l.  it  can  ncconie  aliiu  •:  in  ;i 
niouient  a  most  imijortimat        ti)ility. 

•J40.  i'sc  ;if  credit  <is  a  ilium  u/'  iwclianffc. — Tlu' 
most  important  lunction  ol  cirdit  is  it^  |)o\vit  to  circu- 
lalf  as  a  mcdinm  of  rxrlian^i-.  ()hvionsl\ .  if  cxt-liannr 
can  l)c  consummated  in  lar^-e  volume  hy  means  of  credit, 
the  necessity  of  iiuii'e  national  investment  in  the  |)reci()Ms 
metal  is  ohviatdl.  The  w  lioie  system  rests  upon  thi' 
assumption  Ih.it  not  e\ei-yone  is  ^oinn'  to  |)i'csent  de- 
mand credits  lor  redcmjjtion  at  the  same  time.  Ex- 
cept in  extreme  instances,  the  assumption  is  a  ^ood  one. 
and  credit  has  hecome  tlie  chief  meihnm  of  exclianiic  of 
this  country. 

In  oi-dei-  to  eircuhite  in  lien  of  money,  credit  must 
lie  payahk'  on  demand,  l-'urthermore.  the  issnei-  naisl 
he  one  in  whose  intt'ority  and  ahihty  to  j;av.  the  puhlie 
has  entire  contidence.  Xatin-aliy,  then,  the  credit 
which  eiicnlates  the  most  freely  is  (ioxernment  credit. 
Second  to  this  is  hank  credit,  and  as  this  is  the  medium 
m  which  a  lar<^e  proportion  of  our  exchanne  is  made,  it 
is  well  t(»  consider  it  separately. 

'JJ-I.  lidiili-  credit.  Hank  credit  has  two  forn.s.  notes 
and  diposits.  The  true  hank  note  is  the  simple  {jromise 
of  till'  hank  to  pay  lii^al  lendei-  on  demand:  the  de- 
l)osit  is  prei-isely  the  same  except  in  form.  Thist 
credits  are  creattd  as  the  i-e-nlt  (^\'  an  exchan<.;e,  either 
of  money  for  credit,  or  credit  for  credit.  If  the  cus- 
tomer hrin^s  mtaicy  to  the  hank  he  recei\es  for  it  eilhei 
notes  or  a  deposit  acconnt,  d(  p(  ndiny'  u|)on  which  will 
hest  suit  his  neids.  1 1  he  comes  (o  the  hank  as  a  !«or- 
rowcr,  he  exchanyts  his  ouii  time  cicdit  for  the  hank's 
(hniand  cr  dit  and  a.L;aiii  t;ik(  s  it  in  either  lorm  he  de- 
sires,     it  is  liii-  eredils  thus  created   winch   p(  riorm  so 


NAT!  Hi:  oi'  (  lii.nrr 


^2();i 


-nat  ;i  j)i'n|)()rt ioii  dI'  dim  iiuiiuy  woik.  The  notes 
tii(  iiisch  IS  passing'  trdiii  hand  to  han(L  and  the'  clKcks 
.iiawii  auainst  thr  deposits  eonsuniniate  j)rohal)l)"  '.>(» 
]ii  1-  cent  of  onr  exchanges. 

'The  issue  of  ercchts  intended   t'oi'  eircidation  l)y   pi'i- 
'.;i.t<    persons,  corporations  and  hanks  has  ln(  n  attcnch'd 
so   nuii'h   aliuse   in   \hv   ])ast    that    n'oxcrnnicnts   ha\e 

me  to  re<^'ard  it  as  a  (piasi-puhhc  i'unetion  which  inn>l 
he  i-(.\yiilatcd  sti'ieily.  Accordingly  in  this  co;intiy  the 
iianks  ha\('  lost  the  powci-  to  issue  tiaie  l)aid<  notes,  and 
lan  onlv  issue  notes  secui"c(l  h\-  a  deposit  of  ;4o\ nnnicnt 
liMuds  with  the  I'nitcd  States  'I'reasury.  Oui-  l)ank 
notes  theret'ore  arc  really  ( io\  eiaiinent  honds  con\t  rtid 
Mito  cui'i'iaicy.  Isach  note  is  sini|)ly  a  IraiiURiit  of  i 
l"ind  stripped  of  its  interest  and  payahle  on  demand. 

•J+'J.  Dc/xisil  credit. — The  other  foi'in  of  circidalin<^" 
ii'cdit.  or  ci'cdil  i'urrene\  .  consists  of  cheeks  and  di'afts 
drawn  against  deposit  ci'rdits.  The  enj-rcncy  is  not  the 
rlicv'k  or  draft  Imt  the  deposit  credit  itself:  the  ijocu- 
iiient  is  siniply  a  tcin|)()i'ai'y  foiin  which  the  deposit 
takes  foi'  ciiculation.  'I'lie  di'awiny  and  payin<i'  ot 
I'liccks  do  not  expand  or  contiae-t  the  deposit  curi'cncy 
luit  merely  measure  its  rat(   o|   (ireulalion. 

This  form  of  credit  has  heen  found  to  he  much  in  tl(  ;• 
Miifcd  to  the  needs  of  thickly  ^tttl^■d  communities  than 
lie  hank  note  currtiic-y.  wlna'cas  in  new  rc<,ions  with 
poor  iiankin;^'  t'acilitics,  notes  arc  still  the  favorite 
iiicdimn.  'I'liis  is  Ixcause  of  the  fai't  that  in  new 
lenjoiis.  transactions  are  smaller;  whereas  in  the  I'itjes 
transactions  .in-  lar^c  ;u!<i  it  would  \n  uiosl  hurdi'u- 
somc  to  car/y  ahout  lar^c  amoinits  of  hank  notes  with 
^vhicli  to  settle  oltliu'at ions.  It  is  onl\'  in  this  counti'V, 
iio\\e\er.  that  tiu'  diposit  cinrency  has  ieaclnd  its  full- 


m 


inn 


M<t\!  N'    AM)   HANKINci 


est  <levc'l()|)iiieiit  ;ii!<l  it  is  noteworthy  that  cviii  here  it 
(lid  not  iRoin  to  do  so  iintd  rtst  rict  iocs  \ww  ulacrd  li\ 
the  (ioxcriinicnt  upon  the  issue  of  hank  n(»tes. 

('[)  to  18.>.>  th(  note  issues  oT  the  hanks  exceeded 
their  (hposits.  In  that  year  deposits  lolled  ahta.l 
somewhat,  hut  it  was  not  until  ihi-  national  hank  act  m 
1H(>.)  that  till  \  were  yiven  theii-  I'eal  ini|)ttiis.  Since 
that  time  the  (l(po>its  ha\f  inci'eased  out  of  ail  ijid- 
jjortion  to  the  iiicn  a  of  the  capital  invested  in  Iiank- 
iii^\  while  the  notes  have  materially  fallen  oil'  in 
anionni. 

'2r.i.  Kldslinlji  (,f  (h'pasit  crtdll.--  'V\\v  reason  for 
this  condition  is  to  l)e  found,  of  course,  in  the  increase 
of  |)opidation  and  the  conse(jueut  oi'outh  of  the  hank- 
ing- hahit:  l)ut  even  moi'c  im|)ortant  than  these  factors 
in  its  oi,,\\th  has  hecn  its  innate  ahility  to  provide  a 
inedium  of  cNchanu'c  which  expands  and  conti-acts  w  itli 
the  hiisiness  needs  of  the  country.  There  are  certain 
times  of  the  year  when  exchanges  increase  n'reatlv  in 
volmiR-.  this  condilion  hein^'  partienlai'K-  true  of  siu'de 
comniuiiities  where  industries  aic  not  ^reatlv  varied. 

^foreover.  as  husiness  heconu's  hrisk  or  slack,  Iheie 
aic  (han.'ics  in  the  volume  fiom  year  to  vear.  This 
necessitates  a  constant  cliaiii;-e  in  the  amount  of  the 
medium  of  exchange.  Cnhss  it  is  a  |>eriod  of  m'ncnd 
speculation  and  ertdits  rest  uixiii  an  unstahle  hasis.  this 
change  in  the  demand  foi'  midium  will  he  met  auto- 
maticallv  hy  an  increase  oi'  deciease  of  checks  and 
drafts  drawn  aLtainst  the  dt  |>osit  curreiicv.  W'c  shall 
see  lairr  on  that  this  is  the  only  eui'iiiiev  in  use  in  this 
countrv  that  had  this  atfrihute  of  elasticity.  It  is  oh- 
vioiis  that  the  issue  of  hank  notes  which  must  he  fi/st 
se(aired  hy  drpusil  nl  ( .ov  (  rniiK  nt  honds  with  the 
'l'iiasin'\-  IS  exeeediiii^iv  iiulastic. 


l^^ii 


NATlKi:  (JF  C  l{!.l/ri 


il)o 


Il;i\iii.u'  ('v)nK'  into  cxistciicf  ;is  the  i-csult  ot'  an  cx- 
(■lian<4C'  transaction,  tiicsc  circulating'  credits  scr\c  as  a 
medium  ol'  e.\clian,y(.'  in  a  nuniher  of  transactions  hel'ore 
lli(\-  are  extinunislied.  Tliey  are  usually  li(iuidated  by 
cancellation  of  one  against  the  othei"  tatliei-  than  hy  pay- 
ment oC  money:  so  that  the  exchantits  which  they  ha\c 
made  ha\c  not  merely  ])ost])one(l  the  actual  transfer  of 
mone\'  as  in  the  case  of  the  non-circulating  credits, 
'i'lie  fact  that  they  ser\ c  tlu'  |)ni'|)ose  of  money  and  are 
Usually  setilid  hy  ca.ncellation  misleads  jjcople  into 
supposing  that  they  oln  iat(  the  need  foi-  money.  That 
siich  is  not  the  ease  tliey  leai'u  sometimes  to  their  sor- 
!ii\\  wjieii  th(.i'e  comes  a  u'c'i'ci'al  demand  for  the  re(lem[)- 
tion  of  credits  accordin;^'  to  their  tenor. 

The  vohimc  of  credits  contracts  wliene\cr  there  is 
liiiuidation  or  whenex^r  the  credits  hecome  de|)reeiatt'd 
in  \alue.  As  loni;  as  the  dt  I  tor  (.'ontuHRs  to  meet  the 
matured  ohli^ation  In  mi»ney  their  \ahie  is  maintained 
liut  wlKiuvcr  he  )•(  fuses  to  do  this  \alue  hi-wins  to  de- 
cline concuri'cntly  with  the  chances  oi'  future  |)ayment. 
A  credit  depre<-iated  to  half  its  par  \alue  has  lost  halt' 
its  power  to  do  money  woik  and  is  conti'acted  half  as 
mucji  as  if  it  had  heen  liiiuidated. 

Inasmuch  as  crtdc  can  serve  the  pui'jxises  of  money 
^  \  en  hettei'  than  mone\  ilsclf,  no  person  wiiuld  ever  de- 
mand mone\  unless  lu  thought  ;t  moi-e  \aluaI>U'  tha?i 
the  credit,  thai  is.  unless,  in  his  opiniori.  the  \alue  of 
'he  ei'tdit  had  d(  preeiated.  Such  a  depreciation  could 
take  place  oidy  when  contidenee  in  the  aliility  of  th( 
debtor  t(i  pay  was  imj);!ii'i<l.  'I'hc  only  exceptions  to 
tins  are  cases  whire  ^old  is  riiiuircil  l^ir  use  in  the  arts 
iiid  for  forcjiifn  payments.  The  run  on  the  (io\- 
I'limt  nt  in  lS'J.'{-t'  for  u'old  foi'  tlu  redemption  (^\' 
ureenhaeks  was  caused   h\    IIk    (hmand    i'oi-  liohl   to  he 


HOG 


yU)M.\    AM)   I5.\M\I.N(, 


exported  in  scttlciticiit  of  the  iiih  riiatioiial  l)alaiK'( 
\\liicli  had  oonr  a<4ainst  us.  'I'liis  le,<«itiiiial(  and 
iTUidar  demand  fnr  oold  soon  Kd  to  anotlur  demand 
which  ai-ose  lieeause  people  heoa.n  to  fear  that  tlie  (iov- 
eminent   niiyht   not   he  al)le  to  meet  its  (  Ijh-^ations. 

'''"  maintain  the  \aiue  of  outstanding'  credits  it  is 
necessary  for  the  issuer  to  sustain  the  confidrnce  of  the 
piifihc  in  his  ahihty  to  pay  on  demaiuL  'I'his  can  h( 
•  lone  only  hy  kifpino-  within  easv  reach,  monev  enoui-h 
to  satisfy  all  hut  the  most  extraordinary  demands.  It 
IS  not  enou<>h  that  he  have  i)roi)erty  which  is  onhnarily 
eoinei'tihle  into  means  of  payment,  for  when  the  (U- 
mand  for  licjuidation  comes  it  is  likely  to  fall  on  e\cry- 
one  at  once  and  no  one  will  care  to  |)art  with  money. 
Safely  foi-  the  issuer  of  demand  creihts,  therefore,  lies 
oidy  in  kei'pin..-  ;,t  all  times  a  reserve  of  money  sulli- 
cient  to  maintain  confidence  in  his  ahilily  to  pay.  Tiiis 
reser\  e  is  the  hasis  of  outstanding-  credits. 

•Jit.   (;(,lil    iJic   Ini.si.s   for   (ill    credit.    The    hasis    for 
hank     credit     is     resei'\c    money.      All     of    this     reser\  e 
nKMuy  exeejjt    ^old   coin    is   hased   more  or   less  on   the 
credit  of  the  government.      It   is  kept  at  par  with  <><)ld 
lieeause  the  ,«io\ ci'nmiiit  stands  ready  to  i-edeem   it  dol- 
liii-  foi-  dollar  upon  (kniand.      In  ordei'  to  meet  |)ossil)le 
demands  for  rede?iii)lio!i  thi'  o(,\  (rnnieiit   is  reiiuired  to 
k(rp    a    <iold    reser\e    of   S1.)().()()().(M)0.      The    i)rincipie 
hehind   this  law   is  the  same  as   that   hehind   the  reserve 
section  of  the   National    Hank   Act.      TIk'  cn<iit  monev 
of    the    u.ncrnment    is    hased    uj'on    oojd.      '['he    hank 
'•'•'■'!i<   "!'  the  coimtry  is  hased  upon   government   credit 
money,   plus   n-o|,j.      'rj„>  ordin;!iy   time  and   nxrcntile 
'■'■•■''i'   "''  •'"■  n.-itioii  is  hased  upon  hank  cre.ht.  o-ovf  rn- 


tu.  lit  credit,  money  and  ^(,1,1.      The  f 
iihivti-ates  the  idea: 


ollowiim  (liayraMi 


«#i 


NAiTKr,  oi-  (  i*i,i)ri 


2(t; 


M(i(  .■mtilc  ;in(l   'liiiit'  Cr-iiit. 

,,      ,     ,.      ,  ,  (  Hunk   Votes. 

1  Deposit  Currency. 

('■(ivirmiirnt    ("rcdit    Money. 

L 


Gold. 


•Ji.j.  lifscn'r. — The  t'ssciitial  Icatiirc  of  the  hank  is 
its  powtT  to  Ucx'[)  oiitstaiuhn^'  a  mass  of  non-interest 
liiafin^'  demand  erethts.  either  in  the  form  of  notes  or 
deposits,  whieh  it  has  issned  in  e.\elian<;'e  t'or  interest 
liearin^-  tinu'  ei'echts.  To  keep  these  demand  erechts 
Milt,  the  hank  must  lia\e  the  eonfidenee  of  the  pnhlie. 
This  it  aetjuires  hy  its  capital  and  reser\  e.  'Vhv  re- 
M i\c  re))ri'sents  to  the  depositor  his  ])roteetion,  shoidd 
in'  choose  *o  re(iuest  imme(hate  reck'mption  of  his  cre(ht; 
the  ca])ital  and  surphis,  represents  his  idtimate  pro- 
Iretion. 

The  national  hatd<  act  re(|uires  that  national  hanks 
111  central  reser\  e  cities  (  Xew  ^'ork.  Chicago  and  St. 
Louis)  shall  keej)  a  c.ish  reser\-e  of  "J.")  per  cent  of  theii- 
oi  landin<^'  demand  credits.  This  rcser\e  consists  of 
Hold,  and  (io\ernment  ci'cdit.  'I'he  <>eneral  rese)'\e 
cities,  of  V. Inch  there  are  forty-nine,  must  keep  2.5  per 
cent  reser\e  with  the  privile<>'e  of  de])ositin<4-  jialf  of  it 
n  centi'al  reser\ e  cities.  All  other  national  hanks  must 
ivci'P  a  1.")  |)cr  cent  resi'r\('  with  the  j)rivileg'e  of  (lej)osit- 
in^  .'J-.')  of  it  in  reserxc  city  hanks. 

'2U\.  Kfj'cct  of  rcsiTi-('  r('(/iiir('in('>i(s.  ~'V\\c  amount 
of  reserve  which  shoidd  he  kept  hy  a  hank  dei)erids  npon 


1 1., 


. 4- I'   :»- i   i 


III.  I       V     |V.i(ll. 


I  1  •     !!..., 
1    i       i  i  i  V     \ 


:ire  due  to  other  hanks  they  are  more  likely  to  he  called 
t'oi-  than  if  till  \   -AVI'  ill  th(    h.-nids  itt'  lar<>e  nnnil)ers  of 


•t|"'!;- 


UUH 


MC  ;:\    AM)   HANKINd 


people  seattered  over  tlie  country.  The  aniomit  of  re- 
serxe  nceessavy  eaiiiiot  he  (letennined  \)\  any  fixed  rule. 
'I'lie  purpose  of  t'le  reserve  reiiuireiueiits  ol"  the  national 
hank  act  is  to  put  a  cheek  on  undue  e\[)ansi()n  of  de- 
mand credit  hy  the  ha.nks,  and  forhids  tiiein  niakiny 
further  loans  as  lon^r  as  tlieii-  reser\e  is  helow  tlie  le^al 
rciiuirenients.  hi  |)rospei'ous  times  this  operates  verv 
well,  hut  times  of  ciisis  and  strin<jfencv  are  prolcn^a'd 
hy  it. 

At  such  times  each  hank  strives  to  hold  as  lar^e  a 
reserve  as  possihlc.  refusin^ti-  t<>  make  new  loans  or  to 
renew  old  ones,  and  withdrawing-  its  deposits  from  the 
city  hanks.  The  effect  of  this  is  to  inte:  ''y  the 
strin^'cney.  The  proper  i)olicy  would  he  to  loan  freely 
so  that  solvent  firms  may  not  he  compelled  to  suspend 
heeause  they  cannot  <yct  ready  funds  with  which  to  meet 
iheir  current  ohli<T-ations.  The  Hank  of  Knoland  pur- 
sues this  policy  and  i)ermits  its  reserves  to  fall  to  a  very 
low  point,  hut  it  selects  automatically  the  most  uroent 
cases  for  relief  hy  raising  the  rate  of  discount.  In  the 
panic  of  1907.  the  Secretary  of  the  Treasury  and  J.  V. 
Mor<ian  followed  the  correct  hankinjj;-  principle  when 
they  put  on  the  market  large  sums  of  money  to  he 
loaned. 

24.7.  Ddi^cr  of  NSC  of  credit  in  panics.— It  is  during 
panics  that  an  elastic  medium  of  exchange  is  most 
needed,  and  unfortunately  the  (ie})osit  currency,  ordin- 
arily elastic,  not  only  refuses  to  stretcli  at  such  limes, 
hut  contracts  instead.  Just  as  soon  as  there  is  a  gen- 
eral demand  for  rcflcmptioti  of  private  credits  even  th( 
hanks  are  compelled  to  redeem  their  cred.ts  in  legal 
tender,  whether  their  ahility  to  j)ay  is  thought  to  l)e 
impaired  or  not.  Fo  do  tins  they  must  pay  out  their 
reserve  money.     This   in   turn  cripples  then    ahility  to 


AAll  lii:   Hi     (  Kl.Dll" 


JJ()9 


i"'ii     and      f'uithcr     (Icplili  s      llif     deposit      ciiririK'y. 

Most  of  the  so-r;dlL(I  niiii  iicy  i)ills  wliicli  have  hrcii  in- 
troduced in  C'odoi'tss  lia\c  att(!ni)te(l  to  rcinrdv  the 
i\il  liy  aiiihoi-izinu-  hanks  to  issue  note  credits  in  na\- 
III'  lit  of  the  dej)osit  ere(hts.  In  this  way  note  e  lits 
■onid  he  used  insl(  ad  of  iTservc  money  for  eircuhition, 
,■111(1  unless  the  ei((ht  of  the  haiih  has  Hiireir-d.  reserve 
:roiiey  will  i-ol  he  (h'awn  out.  I 'ndei-  our  incsent  law 
Mk  issue  </f  notes  is  inii)raetieahie  at  such  times  bc- 
iiiise  it  neetssilaiv--  tin  purchase  of  ( 'nited  States 
!"tiids,  whieji  woid<l  findher  (le|jletc  the  amount  of  the 
'Tsei-ve. 

In  spite  of  these  fjirave  dan^-ers  wliieli  attend  the  use 
"l'  ere(ht  as  a  medium  of  exeliaiio-e,  its  use  is  a  necessity 
"f  the  era  (»f  modern  industry:  and  as  the  puhlie  is 
gradually  aionsed  to  a  study  of  tlu'  pi'olilrms.  its  de- 
'rets  Avill  disappear  in  the  wake  of  eompelenl.  Icis- 
l.it  ion. 

■J  1-8.   IiiipoiidNCC  of  en7/;/.--C'redit   is   the  life   !)1()0(1 

:  the  economie  system,  its  amount  and  condition  de- 
''  rminin^-  whetln'r  hnsiness  he  healthy  and  vigorous,  or 
iiiihealliiy  and  sta.niiant.  It  determines  whethei-  the 
[(opulation  shall  he  hnsy  and  prosjjcrous  or  unemployed 
and  poverty  stricken.  Insomuch  then  as  the  science  of 
hankin,^-  ;uid  money  is  so  intimately  concerned  with  the 
\ery  fundamentals  of  iifc^-tlic  procin-ement  of  food, 
shelter  and  clothinn-,  with  h.ealth  and  witii  the  whole 
-iandard  of  li\inu'.  it  assumes  an  importance  cvjual  to 
my  other.  If  all  the  distress  which  followed  the  panic 
of  15)07 — the  la.ilurc  ol  business  men.  the  i-iduction  of 
incomes  amon;^'  all  classes,  the  loss  of  employment  and 

\\;|<rCS    hv    thoUS.Mluls    of    WMl-L- in,   ii      In-ii . ,  i!>i  , .-    i  ■..>,■....),  ■    :..!,. 

^      '.-^     i  ■  ■. 

iiinumerahle    homes      if  all     this    tiemendous    calamity 

was  nniicccssai-y  and  remedialilc.  then  the  subject  is  one 

\  II     II         ' 


i 


LI.;;- 


210 


M()M:V    ,\Ni)  iS.\NKi.N(. 


oi'  tiic  greatest  Imiium  interest,  well  worthy  of  the  at- 
tention ol'  trained  investigators  and  master  minds. 

We  have  progressed  I'ar  enon^h  in  onr  stndy  to 
reahze  that  the  sole  eanse  of  some  of  onr  panies  is  the 
misnse  of  the  eredit  niedinm  and  that  it  is  a  leadini,' 
faetor  in  all  of  tjiem.  Abnormal  and  sndden  eontrae- 
tions  and  e\j)ansions  of  eredit  disturb  the  eeonomie 
e(iuilibriiim  by  eausin^  iluetnations  of  priees,  manipu- 
lating' profits,  and  (ksti'oyiiiH'  the  sj)irit  of  enterprise 
among  those  who  eontrol  the  industrial  aetixity  of  tiie 
nation. 


r* 


i'  ^•' 


CHAPTER  XIII 


EIIKCT  OF   C  HIDIT  OX   PRICES 


•J  10.  ///r;vY/.s7 //.;'■  need  of  more  efjie'ieiit  inotiei/. — We 
ii;i\u  already  scrii  that  the  use  ol'  crccht  afreets  the  gen- 
ial level  of  j)riees  by  iiKTeasini,^  the  etfieieiiey  of  money. 
Were  it  not  I'or  eredit  tiie  price  level  unist  always  he 
lixed  by  the  rates  hetween  the  amount  of  goods  to  be 
(  \ilianged  and  the  amount  of  money  in  eireulatioii.  ])ro- 
\iikd  of  course  that  the  rate  ol'  circulation  remain  con- 
>^tant.  As  ])0])ulation  increases,  more  goods  are 
produced  and  more  exchanging  must  be  done,  hence 
prices  are  certain  to  decline  unless  the  supply  of  money 
is  increased  or  rendered  niore  efticient.  Declining  i)ric(,'s 
Ksscn  profits,  the  inccntixi'  to  iMiterjJrisc  is  deadened. 
ilie  factors  of  ])ro(iuction  become  idle  and  depression  is 
rlironic.  A  develo])ing  counti'y.  therefore,  to  be  healthy 
I  (oiiomically  must  ha\ c  a  constantly  increasing  quantity 
•  I  the  medium  of  exchange. 

This  need  has  been  met  by  credit,  chiefly  in  the  form 
n\'  bank  credit.  In  the  preceding  chaj)ters  the  several 
kinds  of  credit  have  been  discussed  and  it  may  be  well 
til  consider  briefly  the  eff'ects  of  each. 

-.)0.  Effeet  of  unn-eireiddting  credit. — The  use  of 
Hiii-c'ii'culating  credit  (promissory  notes)  has  very  little 
H'ect  on  ])rices  through  any  economy  of  the  use  of 
Hioney  \\\m-\\  it  brings  about  per  sc.  Such  credits  must 
be  settled  at  maturity  in  money.  Hence  the  use  of 
;in.iicy  ]S  p05i()0iicu  iatiiui  iiiiiii  win  uiled.  il  musi  he 
i'emembered.  however,  that  the  use  of  non-circulating 

.'-'11 


;2i! 


MiiMV    AM)   H.  .\KI.\(, 


!;• 


tM 


credit,  while  it  raeilitnti  s  prodiu'linn  and  llius  increases 
tlie  aniniiiit  of  transactions,  at  the  same  lime  ureiitly  in- 
creases th"  mcchnm  l)y  its  i-reation  of  circulating^'  ci'edit. 
The  manner  in  which  non-circnlatiny'  cr'cdits  ni'c  con- 
\(i'te(l  hy  the  hanks  into  cii'cnlat ini^'  ci'cdits  ha>  ali'cadv 
heen  (lescnhed.  Hnsiness  men  issue  promissory  notes, 
(liscomit  them  at  tiu'  hank  and  recii\"e  in  exchan^'c  I):miI< 
ci'edit  (.'it'ici'  in  ilie  I'oriii  ot'  nott»s  or  de])osil  accounts. 

It  is  this  (Kpi.isit  cun-eiicy  which  has  in  tliis  counti'v 
remo\  ed  a  ^|•^•al^•l•  nait  of  tlu'  hui'den  of  e.\(  lianijinu' 
^oods  fi'oiii  111'  sjini.'di  I's  of  aioney  itself.  I'fohahlv 
7.')  per  cent  of  oni'  excliaiims  are  ])erfoi'med  hy  the  use 
of  cheeks  and  di'afts  di'awn  against  these  deposits. 
Mo'ny  must  In  h<l(l  hy  the  hanl.s  aL;ainst  tlu  ir  crediN 
as  a  rcscr\e  to  maintain  conlidenec  in  their  ridemptioii. 
hut  the  amount  neeikd  is  onle  iVoni  l.>  to  '_'.")  per  vci\[  ol 
tlie  oil  I  si  and  mil;  en  dits.  'riiesc  checks  and  dia  fts.  w  hilr 
they  are  merely  pmmises  to  pay  mou' y  and  theoretic- 
ally must  he  r'di  (  iiied  in  mone\  ai''  so  cancelled  one 
ai^aiiisl  the  other  thai  iitlle  actual  money  is  used. 

2.")1.  ('(nicilldlicn  (>f  ciidil.  l-'or  c\;imple,  ht  us 
take  an  is  ihited  coniiiiiinity  in  which  there  art'  twc 
hanks,  tlu  deposits  of  each  heiiio'  Slno.OOO.  ;iiid  thi 
nioiuy  I'csci'xcs  S-J .").()';(».  A.  15  and  t'  are  local  hiisiiiess 
men:  .\  and  15  !i;i\e  deposit  accounts  with  one  hank  ;ui(l 
('  with  tlu  nlher.  If  A  ni\cs  his  check  to  \\  in  pa\ 
iiKUl    for  ;4'oo(ls,   the  check   will   !»e  d.  posilid   h-,    \\  ;ii;'i 

his   accoimt    will    he   crcditiil    with    the    ,11 iiit    of   the 

I'lieck.  whili's  As  airount  \\ill  hi  chari^i'd.  Thus  i^'oods 
have  I'cei!  c.\chan,ue(l  solely  Iw  credit.  If  .\  ^ives  his 
t'lieck  t(i  (',  it  will  he  dt  posited  in  ("s  hank,  ;ind  thcorcHc- 
ally  ("s  hank  m.iy  expect  A's  hank  to  |i'i\  Ilie  check  in 
iiHiiiey.      il    IS    proii.ihic,    ji(iw(\er.    that    i  ;icli    l»ank    will 


Hold 


hecks   di  a  w  II    on    i  h'     nlher.    in    \ 


liicl 


I  i'\(iif   ()nl\' 


El'l  IXT  oi"  cm DIi    ON    I'lxK  !"S 


;n:i 


;ii  (liU'cR'nce  ill  total  anKtiints.  or  baLincc,  will  l)c  set- 
;i;il  ill  money,  in  this  mainiri-  tlu'  clircks  arc  cantvUfd 
■mr-  a^y'aiiist  the  other  without  aii}  use  ol'  money.  It  is 
m')\  ions  that  In  lari>'e  eommunities.  whi.iv  ii  is  eiistoii!ar\- 
':■  ii.akc  s(  tt  l(.-iu(  Ills  hy  cl'i  ■:  !<.  tliis  caii-'cl  iat  ioii  hccoines 

I  ,'y  i!ii]).)ffatit .  IIow  \(  i'\  ii!i])0!'tan!  t!;  -  eiisinm  lias 
lieconie  \\i!l  he  sf.n  when  Ihi  liin;'l;ons  of  the  ehai'im^' 
hdii^e  iwv  discussed. 

•J.5*J.  II(>ic  Icx-scncd  (Icindiid  far  itioudi  causes  rise  hi 

i/vVc.v.- Thus  moiuy  is  nsed  hy  the  hanks  only  as  a 
:t  sirve  a<4'ainst  actual  ',\ithdra\\  a!s  ol"  luoniv  and  I'oi'  the 
vcttlemeiil  of  l)alanccs.  Tiie  ellicieney  of  the  dollar  is 
Ny  this  system  mnlti])lied  several  times,  hence  the  de- 

.   ;id  for  money  is  lessened,  and  prices  l(,  nd  to  rise. 
The  introduction  of  (h.is  Nirni  of  cicdit  must  alwavs 
'  i'    an   im|>oi!  uit    inline  net'  u|)on    |)ric(  s.      \\\   ])oorl\- 
Mid  communities  \\liei-e  iiafikin^  'acihties  are  mcayre 
tile   nierchanl    and    the    farmer   must    keep   on    iiand    in 
their  cash   drawers  m-   pocki  ts   sullicient    mouc  \'   to  ae- 
eomphsh   tiicii'   i)urcli;:s' ^.      il    is   in"ou\  (  iiieht    to  make 
|t:'yM;ents  hy  clicck:   in    fact,   if  th(\    did   so.    the  cheek 
would    prnfai"!',    lie   ro||ow((l    h\-    llie  del!\er\    of  jielua! 
!'ioney.     'I'liere  is  uo  way  lu  which  (hev'k->  can  he  can- 
celled   against     eaeli    otlur.      With     the    eslaltlishinent 
"\    l)anks  and   the   i^rowth  of  lh(    ellecl^in'4■  hahil.   Iiow- 
tver.  the  necessity  lor  earr^inij-  ahout  larirc  amoimts  of 
actual  money  is  o\('rcome.     'I'lie  demand   foi-  moiwv  is 
tliercoy  lessened,  am.  prices  ayain  tend  to  rise. 

2.").'?.  Klf'cvt  (if  ii'ilioiKil  haul,'  notes. —  In  the  chapter 
"W  the  nature  of  credit  th(  dill'i  leuct  hetwicn  tht  true 
hank  note  and  the  naiinual  hank  rx.tc  was  descrih(il. 
Iiiasmncli   as   the   national    hank    notts   ai'e   secured    hy 

i  iCtYv  iijiiii  ill     i  .  iiiis,    "\\iiiCri    tirc    llH  m  i'      jiiUl;     iui''    (lOV- 

■  riimcnt   eicdits.   tlu\-  ciieulat(    freely  as   nnau  \    dsell' 


I 


i* 


.1 

ii 

-  * 


J2l-i 


-Mo.vi:';  AM)  H.\\KiN(; 


TIrIi-  cfi'cct  on  prices,  therefore,  corresj)()iHls  to  tlic 
efiVi't  of  otlier  I'oi-ms  of  (ioveniment  e'-edit.  and  will 
be  discussed  under  !liat  lieadinu'. 

•i.54.  Jidiil.'  nates  and  chcchs  dilfcri  n'iaUd. —  It  hds 
been  ah'eady  staled  that  the  (nffereru-f  l)et\V(en  the  de- 
j)osit  and  the  true  bank  note  is  one  of  ,'nrin.  It  remains, 
however,  to  describe  the  (HftVrenee  in  t'niiii  before  the 
effect  of  true  baiik  notes  'ipon  prices  can  I)e  considered. 
The  chief  (htfereiice  is  that  the  baidv  note  is  payable  to 
bearer,  whereas  checks  and  (b-afts— the  foi-nis  in  which 
tlie  dei)osit  currency  circulates— are  usually  di'awn  in 
favor  ol"  a  dt'tinite  pa>ce.  Bet'oiv  the  check  is  valuable 
it  Miust  be  endorsed  by  the  jjayce,  whereas  the  note  cir- 
culates V.  ithout  endorsenient.  I'urtlicrniore  the  value  of 
a  check  de|Hnds  U|)on  the  si/(  of  the  dej)osit  account 
l)ossessed  by  the  maker  oT  the  check.  Thus  checks  do 
not  ci"culate  as  freely  as  notes  l)ecause  both  ()ersonal 
and  bank  cicdit  .are  inxohed.  'I'liey  usualiv  rctui'ii  tn 
the  bank  i)romptly  for  ndemption.  whereas  notes  may 
i'liiain    Mitstandin^'  for  considerable  periods. 

Because  notes  arc  nuant  t'or  wider  circulation  t!  an 
checks,  they  have  Ik  en  licnerally  iiido\»e(|  with  ci'rtain 
preferences  o\er  deposits  that  eiialile  tiiem  to  meet  more 
readily  the  demand  for  hand  to  hand  nionev.  'i'lusi 
banks  I  ay  be  eomiH  IKd  to  keep  a  l.aru'er  and  speeilic 
rescr\e  for  !h(ir  i( demplion.  or  |)erliaps  a  unaranle- 
fund  with  the  (iovernmenl :  or  ;is  in  this  country  tin 
notes  may  l)e  a  first  li<'n  on  all  the  .assets  (d'  the  bank  and 
be  .secured  by  tli(  pledge  of  (.oxcrnmeid  bonds.  'I'hat 
there  is  danger  in  endowing-  \\u  \\-  securitv  with  too  m- 
Hexible  provisions.  S(>  that  once  issued  they  become  a 
part  of  the  actual  money  supply  and  ju'c  never  j)i-c- 
senit'd  ior  redt nipt  ion.  \\  \\\  Ik  se( n  when  our  own  bcini> 
noti'  syst(  in  is  deei  iIm d  m  a  subscijiient  ejiapt 


KFFKC  r  OF  (  KKDir  ON    PRICES 


21:) 


The  true  hank  note,  that  is.  one  whieh  is  not  secuicd. 
hy  the  pled^ic  of  spccidc  assets  or  a  deposit  of  honds  hut 
\<y  die  (general  cre(ht  ol'  the  hani<,  may  have  a  very  im- 
port ant  eft'eet  on  priees.  Vnv  exani])le  let  us  suppose 
that  the  holdir  of  deposit  erechts  needs  money  for  hand 
1(1  hand  transactions.  Pt-'haps  he  is  ^'oing  away  where 
]iv  is  not  known  and  wliere  his  elieek  wouhl  not  he  hon- 
iicvl.  II'  note  issue  were  <4'reatly  restrietech  the  hank 
piiist  lionor  liis  er"(ht  hy  the  ])ayment  ol'  actual  reserve 
iiiDney.  Fnder  a  system  of  free  note  issue  on  the  other 
hand,  no  money  would  i)L'  needed;  the  haid<  would  issue 
tlie  noie  which  would  he  ucnti-ally  acet  j)tai)K'  and  would 
itniain  outstanding'  oidy  as  iono'  as  thei'c  was  demand 
I'lii-  it  as  a  medium  of  exchange.  Once  in  the  possession 
n{'  another  hank  it  would  he  picscntcd  foi-  redemption 
li(.cause  money  is  u'ore  valuahlc  to  ;!  hank  than  errdit. 

The  use  of  the  hank  note  tends  to  raise  prices  hy 
'  ss(n!n<4'  the  demand  for  money.  Its  chief  henetit. 
however,  aiises  i'rom  the  fact  that  it  so  often  j)revents 
prices  from  falling  sharply  wlun  any  extraordinary  de- 
iiiand  for  hand  to  h.uid  monev  (such  as  wv  are  aj)t  to 
lia\e  at  eei'taiii  timis  of  the  year  and  arc  sure  to  ha\'e  in 
panics)  causes  a  depletion  of  i)ank  rest  r\  es  and  a  coii- 
t  paction  of  ei'cdit. 

'2')'i.  Klf'cct  of  <^(i:-fnnncnf  credit  wouvji. — The  use 
'I'  (iovernmeiit  eiedit  money  and.  in  the  counliy.  of 
iiiitioiial  hank  notes,  has  praelicMJly  the  same  effect  on 
priees  as  a  similar  inc-rease  of  actual  money.  When 
taith  in  the  redemption  is  entire,  and  when  it  is  uiade 
M  i4'al  tender  .tnd  is  tjiert  lore  a\ailal)li  for  hank  reserves. 
m  ificrease  in  (Joverrmieiit  credit  mon«y  ten'ls  to  raise 
piicis  just  as  would  an  incnase  in  yold  itself.  A  eon- 
iiiviiii^ic  iSMiie  Ol  iicW  (iO\  ei  iiiiieiit  eicOit  lii  ;t  Mii^ir 
I  on. dry  will  in   ('net   inciiase  prievs  ail  o\  i  r  uk    world. 


)i 


:i  1  () 


MONJ.V    .\\i)   15\NKI\(; 


Its  lirst  effect  is  ;i  I'isc  of  prices  in  Ww  issiiiiin'  countrN, 
'I'liis  means  tlial  imporls  will  incrc.ise.  and  exports  di- 
miiiisli.  I'inally  uold  nnis!  he  exporUd  In  setllemcnt  of 
tile  iiitei-iiatioii.il  halanee.  and  tlius  u()ld  will  tend  to 
raise  prices  in  the  other  countries. 

"J,)«i.  ('/-((lit  (iiiil  spccnlalioii.  Tlte  nsc  of  credits, 
particularly  hank  credit,  has  a  furthei-  eJlVct  on  prices 
in  that  it  fosters  speculation.  Speculation  is  that  sort 
of  huvinu'  and  selling'  whicli  does  not  lieli)  to  move  troods 
alono-  the  chaMnei^  oi'  industry  and  cointnei-ce  from  the 
pi-oductr  !o  the  cousin, lei".  The  ohjeet  of  speculation  is 
yain  fi'oin  the  a(l\  i  ni  ilioii-,  Ihiclualion  of  price  and  not 
from  the  natural  inerenu  lit  in  \aliie  of  Lioods  arisin<' 
fi'om  increasi'd  utility  as  they  ap])roach  coiisumpti'j?!. 
Legitimate  speculation  tinds  to  e(]uali/.e  suj)plv  over 
loni^-  periods  and  ada|)t  it  to  the  d(  iiiand.  thii^  minlnii- 
/\\\[X  !hletllation>^  .if  pi'ict  ami  di^t  riliijt  inu  its  i  Ifeets  in 
the  least  harmful  \\a\ , 

llle,U'itiiiiate  '^p(  ■iilai  ion  increases  lluctuations  of 
price,  either  tli!'oi:i;h  Iradiim  in  imiDi'an.H'  ol'  conditions 
nf  supply  and  d(  iiiand  uv  i.y  niaiiipiilat  in^  the  markc! 
and  causing  t,  inpniary  ciianLi'es  which  arc  iidl  iustilicd 
'•y  ■^I'l'l*')  and  demand.  It  mak.-  ]triccs  ahiHtruiai. 
iisiiallv  aliii(irm;dl\  Iul:!!  a!  lirst.  ri>Mnwcd  hy  a  period 
w  hell  llicy  air  afnoriii.',II\   low. 

l»uck(  t  shijipiiiM  and  mei-e  o'amhiiiio'  im  j)ricc  (liic- 
tiiJitiouN  are  not  relVri^d  'o  lure:  thoiiuh  rcj)relicnsil»le 
in  tli(iiisclves  and  iniuiidiis  to  puhlic  morals,  thev  do 
not  (  \erl  any  elfi  i  I  mi  prici  s.  It  is  onl\-  wluii  |ti'o|>- 
ert\  Is  actually  hoiiuht  and  sold,  w  Im-u  the  d<  niand  and 
supply  an'  altc  i'(d.  tli.il  cjiaiim  s  in  price  result. 

-'u.   llo'c  sjx'ciilation  nui// hi  Imlh  rfin\f  dud  (■//'ret  of 
a  r.-.si  ill  jiiirrH. —  'iV*  Imi\   propcriy.  one  i    list  h;i\c  mean 
of  payment.      Spccidalion   rci|uires  that    tin    speeidator 


-# 


I  i'M:(  T  OF  C'Hl.Di'l    ON    I'liK  i:s 


III 


mist  not  only  li;ive  nicinis  ol'  payment  hut  tliat  he  must 
ic  aide  to  hold  j>ro[:ei-ty  out  oi'  the  market  for  ii  time. 
Ill  spei'ulation.  tlien.  eapi'al.  instead  of  heiii^  invested 
])ro(lueti\  e  entcrpri'-es  and  addiiiu'  to  the  supj)ly  of 
Is.  is  locked  ii]i  ill  li'oods  in  the  hopi'  of  profit  not 
!'\-  ])ri)diiet  i\  (■  increases  hut  h\'  a  ri>e  ol'  prices.  Pro- 
iliictive  prolits  arise  i'rom  an  increase  in  the  amount  or 
utility  of  ,n'oods;  s])eeulali\  i'  profits  from  aitilici'd 
scarcity  ol'  ^oods.  .Speculation  is  hotli  llie  cause  and 
t  ircet  of  pi'ice  l!iictii;itions;  a  natural  increase  of  price 
\'.  ill  start,  often,  a  specuhitive  hoom  whicli  soon  makes 
mices  ahnormally  hiy'h. 

C'recht  is  the  instrument  of  spei-idation.  It  furnishes 
ilie  medium  of  I'xchanuc  which  iileases  prices  tiinpor- 
iiily  t  I'om  tlieii'  depiiHleiice  on  mone\'.  and  jxrmits 
;li(m  to  soar.  It  enahles  persons  with  small  ea))ital  to 
|)iirchase  and  lio!il  property.  If  credit  were  unknown 
and  e\ery  e\cliaiii4\'  of  projx  ily  rei|uired  money,  spec- 
ulation would  siill  exist  on  a  small  scah  :  iione  hut  cap- 
italists. howe\ei\  could  (linage  in  il  and  tlu  money 
which  was  di\eiied  l(»  the  speciilali\e  hiixiiii;'  of  one 
rMiiinioditx  would  he  withdr.awn  I'rom  otlKi"  usi  s.  and 
liie  |)rices  of  otlu  rs  tliiiiLt's  must  fall.  A  1^(111  :a\  spec- 
lijativc  mo\inieiit,  therefore,  would  lie  inipossihie. 

So   far  we  ha\e  spoken  ot'  the  ell'i ct   of  the  various 
lorms  of  credit  only  as  com))ar((l  to  a  s\slt m  in  which 

iiiit    IS  iiol    used.      This  was  eipiivalent   to  coiisideriiiL!' 

ei(  ly   the  ell'eet  of  an   increase  or  expansion  of  credit. 
I'   nniaiiis  llierefdic  to  exaimiu'  the  ell'eet  of  prices  of 

I  CI  ml  ract  ion  of  eredii . 

•J.')S.  /),/'((•/  '//■  ')iir  cnrmicii  .si/slrni. — T'^iiforfun- 
lely  this  is  tile  ureal  defect  of  our  credil  s\stem.  I  'n- 
li^e  e\|)ansi(iri.  wincii  is  liia'iuai  and  aiw.i\s  lakes  piaee 

II  answ<i   t<i  a  d'  ipiiid  f'>i'  iiiouex.  conlraction  of  ci'cdit 


218 


^rONKV  AND  H.WKINC; 


is  likely  to  be  very  sudden.     Moreover,  it  is  likely  ti 
oceiir  after  a  long  period  of  expanding  credit  and  ris- 
ing prices;  therefore  the  contraction  and  consequent  fall 
of  prices  will  he  the  more  acute. 

We  have  seen  that  credit  dej)ends  on  confidence  that 
the  debtor  will  be  able  and  willing  to  meet  his  obliga- 
tions. If  anything  occurs  to  destroy  this  confidence, 
there  will  be  a  general  demand  for  payment.  More- 
over, it  does  not  always  take  some  givat  ])oliticaI  up- 
heaval to  cause  this  disturbance,  particularly  if  credits 
are  greatly  e\])anded  and  prices  high.  Any  decided 
fall  in  prices  in  any  great  industry,  due  perhaps  to  con- 
ditions entirely  j)eculiar  to  that  industry,  may  cause  a 
general  slum])  of  the  stock  market.  This  shrinkage 
in  values  causes  doubt  to  be  cast  on  tlie  ability  of  debtors 
to  pay,  and  such  credits  as  are  due  are  j)resented  for 
payment.  To  meet  these  obligations,  debtors  must  sell 
their  goods  and  ])r()perty.  Since  no  one  cares  to  pur- 
chase, prices  decline  sharply,  to  be  followed  by  still 
greater  distrust,  lower  valu(  s.  further  selling  and  so  on, 
with  cumulative  effect.  This  process  continues  until  a 
large  portion  of  the  credits  have  been  li(juidated. 

This  condition  is  not  attributable  to  credit  itself,  but 
to  our  particular  system.  The  great  desideratum  of  a 
credit  curreiic-y  is  elasticity-  tlie  power  to  r\])and  when 
it  is  stretched  and,  what  is  more  important,  to  contract 
of  itself  when  tin-  |)ull  is  removed.  The  amount  ol 
nadily  acceptable  medium  of  e\ch;uige  should,  liow- 
ever,  exj)and  (juickly  and  without  restrictions  when  a 
general  demafld  for  liijuidatioti  ajipears.  Hence  if  the 
banks  could  issue  notes  freely  in  times  of  panic,  a  vast 
amount  of  credits  might  be  li(|iii(laled  without  resort 
u)  a  depiction  of  tsank  reserves.  i  lie  <  !}■( ct  of  li(|uida- 
tion  on   j)rices.  therefore,  would  not   be  so  eumidative. 


Kii'r.c'i'  OF  cui:i)rr  on  phrks 


^li) 


!i  should  not  remain  outstandini;'  l()n<4'ei-  than  there  is 
an  actual  demand  for  it  as  a  medium.  AVlien  times  are 
prosperous  and  ])r()lits  inereasin^'  with  rise  in  ])riees. 
stoeks  lend  themselves  readily  to  speculation  anil  I'or 
that  reason  are  a|)t  to  he  ahnormally  hi^uh. 

All  the  money  in  existence,  however  cannot  be  said 
to  he  in  circulation,  and  hence  is  not  oll'ered  for  goods 
at  anv  one  time,  liesides  the  limitation.s  on  the  num- 
her  of  exchan<4es  which  the  average  dollar  can  niaUe 
within  a  given  time,  it  fre(|uently  haj)i)(ns  that  dollars 
aie  hoarded  for  loi\ger  or  shorter  periods;  until  they  ai'c 
again  put  into  circulation  they  might  _just  as  well  he 
iini\-existent  so  far  as  their  effect  on  prices  is  i-onci  rned. 
\Ioreover,  the  amount  of  the  crtdil  mcdimn  of  exchange 
wliieii  is  oll'ered  I'or  gooils  constantlv  \  aries. 


i  ta 


I  i 


>  (I 


CHAPTKK   \IV 

(i()\"i:i;\.Mi,\-i'  (  Ri.iJir  <  ii;i! i:\cy 

2.')9.  (  !,i.'-:,//if(ilii,ii  i,f  ;:;iivcni incut  credit  c/irrcnc//. — 
A  lar.yv  niiUMinl  nl'  the  moiuy  .siii)|)ly  (.f  tlu'  riiit-d 
States  coiisisls  of  CoMi'Miiuiii  rrcdil.  I 'luk  )•  thi:,  luad 
must  he  classed  the  i;ir<ii!.;icks.  \\\v  tiTasui'v  notes,  yold 
and  silver  eertilieaks.  sih'er  dollars,  and  all  siihsidia- v 
coins.  Tlitsc  are  ail  foi'nis  ot'  citdit  niofuv.  hecausf 
they  derive  their  value  as  media  (d'  exehanue  I'rom  tin- 
(invei'nuK  nfs  ahilily  and  reachness  to  redeem  them  in 
.i^old  on  d(  tnand. 

It  is  oh\ions,  h<iucNer.  that  liuy  do  not  all  di'pend 
e(iually  upon  the  ( .o\ crnnienrs  o;i.||,.,-;d  credit.  Sii\er 
dollars  and  the  suhsidiary  coins  possess  a  certain  \al 


ame 


in  themsrhes  hecause  of  IIk'  nielal  they  contain,  (iold 
and  sih.  ti-  certilicates  ai'c  uwvv  warehouM'  recei|)ts  for 
an  e(ini\alent  amount  of  metal  held  in  tjie  treasur',. 
and  d(  p(  nd  only  u])on  tlu  safe  kivpin,^-  of  that  metal. 
The  ^i4ree.nhacks  and  licasury  notes  only  are  true  creiliL 
money. 

Credit  money  should  not  he  confused  with  Hat  monev. 
We  ha\(  ah-eady  notid  that  the  -old  dollar  derives  its 
\alue  hoth  I'roni  the  metal  it  contains  and  I'rom  the  (K- 
mand  for'  it  as  a.  medium  (d' e\chann('.  Tndcr  oui-  sys- 
tem of  fnc  coinaL;c  the  supi)ly  is  regulated  auto- 
maticaii\-.  in  (  conoiine  spi celi.  the  n(,|d  d,,||;,r  is  known 
as  c(  ^muiodil  \    uionew 

hand,   is  any   monev   the  suppiv   of  wjiich  is   rculated 


cuM:iiN.Mr.N  r  c  ki:!)it  (  riiivF.Ncv 


^:,!l 


iiitilii'ially  and  the  ilnnaiul  for  \\hicli  is  llie  result  oi' 
jK  scr\ii'(.'  as  a  iiicdliini  of  cxc'!iaii<4C'.  It  may  \)v  cnni- 
pKsrd  of  \ali!a!i!c  metal,  or  it  may  nut:  in  any  vvvi\\  it 
i>  not  its  contents  oi'  conx nlihility,  hut  its  cxclian^e 
utility  that  fixes  ils  \alne. 

Ci'edit  money  is  a  piomise  lo  pay  eillier  fia.t  or  com- 
iiUMhty  moniy.  i  i'  it  is  a  diiect  promise  to  pav.  it  is 
■-"!'!  to  !)e  I'edeemal*]' .  ;-l  Kasi  as  ion^'  as  the  promise 
!■>  kept:  if  the  rcdeiupl  ion  !-.  sii-^peialed  or  if  it  does  not 
ih  pi^nd  upon  a  direct  pnaiiisv  to  pay.  hut  upon  its  cus- 
t"ni;iry  redem])tio!i  hy  ilii-  ( io\  eiaiment.  it  is  said  to  i>e 
ii  redeemahle.  The  diii'ei  ri;e;>  hetweiii  iriH  deemahle 
ei'edit  and  lial  ii:oney  is  tliai  '])'■  ;;()0(1  laiih  o!  Ilie  (Jo\- 
(  rnment  is  pledu^il  to  the  redemption  of  th.e  former  in 
spite  ot  a  ])eriod  of  suspension  and  its  \alue  ',\ill  aluaxs 
!■(•  iiifhienei  (1  liy  the  pros])eet  of  its  actual  redemi)tion. 

■jrd.  Factors  (h'tcniiiiiiiiii  tlic  vdhic  of  cntlii  nniiu'/i. 
-  Since  commodity  money  deri\es  its  value  hotli  froni 
the  \alue  of  the  metal  it  contains  and  fVoni  the  need  foi' 
ii  as  a  me<iium  of  exchan<4<,',  credit  money  hased  on  ^old. 
w  hethei-  nominally  redeemahle  or  not,  d(.|)rn(ls  for  its 
\aluc  first,  upon  the  pMospn-t  of  the  rtdemption  and 
•econd,  upon  the  supply  of'  laedit  money  relative  to  lie 
e\cliaiiuin<4'  that  is  to  Ik  done. 

In   an   earlier  chaj)lu'   wf   saw    how    the    ^'rccnhacks 

Miictuatcd  in   value  rtlati'.ely   to   i^old  dui'inL>-  the  C'i\il 

W  nv  as  their  redemption  sr;nn(l   inuuediate  or  I'emote. 

i  his  was  not  the  soU'  reason.  Iiowivai',   for  their  fluctu- 

,;tion.      Within    narro\\er    limits    the    relafi\e    \alue   of 

ricnhaclss    lo    n-old   and    of     i^nods    to    irre(  nhacks    fell 

ilh  each  additional  issue  of  notes.      'I'liis  caii  hardly  he 
1 1  ..:i.. .  1    .1   I  .         I     1 :    (•  ii.  .  1    ii.      : .   i      ..     i    . 


ill 
3  ii 


ium  more  uncei'tain:  if  tlu'  ( io\ ciaiment  coulil  redt cm  at 
■ill.   it    x'.oiild  mai.L'   little  dillVi'ence   whetlur   th(  re   were 


11  '<  - 


>  i 


ooo 


MO.NKV     AM)    I{.\NKING 


SIOO.OOO.OOO  nu)iT  or  less.  It  can  iiioiv  rca.sfM-.!,iy  |„ 
attni)iitt(I  iiKTcIy  to  an  iiuTcasc  of  tlic  money  supplv, 
wliicli  in  itsi  ir  was  snflififnt  to  raise  prices.  It  is  iin- 
possihle  to  reach  any  definite  conclusion  as  to  how  miikIi 
of  the  liiK  fualion  was  caused  hy  each  ol'  these  in(hlenee^. 
I'lit  it  isclt';;r  that  they  were  liolli  at  work. 

In  fact,  wiien  after  1S<;8  tlie  (iovcrnnient  siispen.iM! 
entirely  tlie  retirement  of  the  -^reenhacks.  they  ei.n- 
tinned  to  circulate  and  even  rose  rapidly  in  value.  Dnr- 
ino-  the  year  that  followed  they  were  practically  Hat 
mone;  draw  inn-  their  value  solely  from  the  demand  (ui 
them  as  a  medium  of  exchano-e.  In  ISC.'.),  jiowever. 
Congress  passtd  what  is  known  as  the  Public  Credit 
Act.  j)ledo-inM-  tlieir  icdemptlon  in  coin,  so  that  they  re- 
sumed their  character  of  ertdit  monev. 

•iC.-i.  h'isk  in  free  ti.sc  of  credit  //;o//e//.— The  theory 
hehind  the  issue  of  credit  money  is  that  it  economi/es 
the  use  of  o-nld  and  i)revents  price  Ihictuations.  Its 
most  ardent  adxo.  aUs  claim  that  it  can  become  tjie  sole 
medium  of  e.xehanoe  in  a  nation  witere  confidence  in 
the  n-.,vernm.  lit  and  its  ability  to  redeem  in  no|,|  js 
maintained.  This  confidence  can  be  sustained  l)y  a  re- 
serve of  noj,|  upon  which  the  country  will  draw  only 
for  t!ie  purpose  of  payino-  f,,,-  imports.  Furthermore 
its  supply  can  be  ren-ulated  and  adapted  to  the  varyinir 
need-,  of  industry:  at  least  Mich  is  the  claim.  That' it  is 
a  dan.i^erous  device,  howevei-.  the  hi-tory  of  ahnost  cverv 
nation  shows. 

•J').'J.  h't\iiulati,,n  of  credit  ///o//(V/.^That  credit 
money  eeonomi/.s  the  use  of  nold  is  evident:  lien.'c  so 
far  as  it  can  be  issued  without  ill  eflVets,  it  must  be  a 
!)/ ii.fii   o,  •■  1. .,(;,>.,       'v\ .1    I  •     •     -^ 

tion.      The  cU'cct  of  any  issue  of  credit  money  on  j)rices 
and  ..n  the  money  supply  has  alrta-ly  been  "mentioned. 


(.i)\  i:un.mi;ni'  (  i{i:i)rr  c  ikki-nc  v 


i)o;J 


I'liccs  risf  ht'cjMisc  there  is  niovc  c'ii'culatiii^j;'  iiu'dinni; 
tlii^  iiicreiiscs  imports  wliieh  are  always  ciuiek  to  take 
;i(i\aiita^e  of  a  risi'  in  pi'iee:  ^old  Hows  out  of  the  coun- 
try to  pay  for  the  imports.  Prices  tlieu  fall  somewhat 
ill  the  issuin<4'  country  because  of  the  loss  of  <^<)l(l,  and 
v\^c  abroad:  in  the  end,  world  prices  are  readjusted  on  a 
liiLiher  level. 

This  will  take  placi'  \\h(iie\er  there  is  an  issue  of 
iirdit  money,  \vhether  it  is  I'edecmabk'  or  irredeemaltl''. 
As  lon;^'  us  the  issue  is  not  excessive,  tli;it  is.  as  \ou;j;  as 
Uii'  amount  of  credit  money  issued  does  not  appi'oach 
llie  amount  of  ^old  formei'ly  in  circulati<in,  its  effect  is 
not  dan^'crous.  When  the  issue  of  either  becomes  ex- 
er^si\e,  so  that  all  the  yold  Hows  out  in  payment  for  im- 
poits  or  is  hoarded  in  ex])ectation  f)f  such  a  condition, 
the  ciedit  money  becomes  the  standard  of  prices  and  the 
sn\c  medium  of  e\chan,Gce, 

At  such  times  it  makes  little  difference  whethei"  the 
iicdit  money  is  nominally  I'edeemable  or  not.  M,\en  if 
it  is  redeemable  and  the  ^'oxei-nment  keeps  a  ^old  re- 
serve for  the  purpose,  it  will  soon  be  depleted  because 
■ill  ci'cdit  money  issued  in  excess  of  the  monetary  de- 
mand will  promj)tly  i)e  ])resented  at  the  treasui-y  for 
rtilemption.  When  this  leserve  has  been  paid  out, 
credit  money  of  either  kind  becomes  irredeemable  in 
fact.  The  only  difference  between  the  two  forms 
M  ( ins  to  bf  that  irredeemable  credit  will  drive  tin  <rold 
(lilt  somewhat  faster.  A\'hen  the  ^'o\  (M-nment's  ])roniise 
In  pay  is  express,  and  a  resei've  is  kept,  public  confi- 
'!(  nee  in  the  redemption  will  last  lon^c  r.  so  that  hoard- 
nn-  will  jiot  start  as  soon.      In  other  woi'ds.  a   o-icater 


....     .....f         .  I'      ...       I     ._    :....i..l.1  fl.    ...  i'      :....        !  .         .1    !  !l 

be  issiK'd  with  safety. 

The  iiionient  that  credit  mont  v   fails  to  circulate  at 


MTM.N     AM)    i5.\\KI\(, 


]);ir  w  itii  l;i>1(!.  IIk  crfdit  PDncy  is  said  to  !k'  ilcprcciMti'd 
ciincnc)-.  'I'I'.is  will  take  |)lacc'  U^ui^  hd'orc  all  tlu'  <4o|d 
lias  lucii  (lii\ni  out  of  ci'-cnlatioii.  'I'jic  standard  oi' 
j)ric(.s  w  id  l)c  a  d(!!d)lc  one;  i^onds  will  \)v  pi-iccd  so  nil  id  i 
li)|-  ,L;o!d.  and  a  i^rcat-i'  amount   !'or  tlir  credit  niotiex'. 

■_'(;i..  .Orr/cr.v  to  iimniiaiii  v/iliic  of  crcdil  iiKiiicf/.  It 
has  liccn  Hie  history  oj'  ci'edil  nioiuy  tliat  cirorts  arc 
Usually  made  to  kec])  llie  credit  circniatinu'  at  |)ar  with 
,yi)id  hy  making  it  lcL',al  iendei'.  This  mean^  that  il 
must  he  accc|)ted  in  paynunt  ol"  all  dehts.  While  tlii 
l'catiii-c  increases  its  elliciency  as  niotiey.  and  theoretic- 
ally makes  it  a  iiiore  ])ci'('eet  sul)sti[iite  foi-  ydld.  it  is  a 
mistake  to  cencliide  that  ii  will  ])r(\('nt  d  'preeiation. 
\Vi  ha\c  seen  that  Ihe  \alue  of  (  reihl  mont\-  depends 
ii)st  upon  the  prosp.  ct  rA'  its  rcdcm|)tion  and  second 
upi/ii  its  suj)piy  relali\e  to  tlie  money  work  which  is  to 
he  done.  Tiic  leija!  '(iuh  r  stamp  does  not  increase  the 
])rospect  of  redeiiiplion  of  icdecmahlc  credit,  hecaiisc 
for  that  the  ,l;o\  (.i-nmer.f  "s  faith  is  already  delinitelv 
pledged. 

It  is  only  when  credit  money  is  irredeemable  that 
niakin/;'  it  le.ual  tei;der  to  i)i'e\ent  depieciation  is  hene- 
licial.  In  this  ease,  the  ;^o\ernmtnt  is  not  alread\-  dcl- 
initely  plcd-^cil  to  redeem  the  credit,  hein-e  anythinii 
attaclu'd  to  it  which  is  an  e\  idencc  of  the  _ii'o\  ernments 
,Uood  faith  inci'-'ases  puhjic  contidence  in  its  re(Iem})tion. 
The  piomisi'  to  aeci  pi  it  in  payment  of  debts  to  itself  is 
(>b\  iously  an  e\  idencc  of  its  purpose  to  redeem. 

2<».").  f/'/T-;  /•//'"( 7,7  rr((lit  iin/  "idifil  iii(,iu\//."  It  must 
h'  aduiitted  i:.  support  of  tiio^e  theorist,  \^■ho  advocate 
I'le  nse  of  u-nvernincnt  cr(  dil  as  the  "ideal  moiiey""  that 
i'  has  hi  ell  tri(d  Usually  under  Ihe  most  inaiisijicious 
c:reunislances  its  issue  ncneraily  ha\  inu  been  rcsortt'd 
'.\ars  or  to  maintain  pros])eia't\-  whi(  ii 


ti 


>  oiii\'  to  Ini;  'ic 


(;()\  iiKN.Mi'A'i"  (  iii;i)ii'  (  ruiii.Nt  ^ 


::i> 


lias  already  <4;r()\vti  im1i(.'altliy.  If  it  (•(uild  ln'  issued 
witli  the  sole  aim  of  steadying  prices  under  I'lm- 
(litioiis  wliieli  woidd  necessitate  its  rcdeaiption  wlun 
the  nei'd  tor  it  disappeared,  it  might  Itecome  a  \ery 
iffeetive  instrument  in  the  hands  of  a  com])etent  gov- 
ernment. 

Its  issue  on  this  theory  is  im})ractical)le,  however,  hc- 
eause  automatic  redemption  is  impossihle.  When  eon- 
tidence  in  the  government  is  genei'al,  all  forms  of  credit 
issued  hy  it  find  their  way  into  the  clKUinels  of  trade, 
causing  a  rise  of  prices.  As  long  as  confidence  is  main- 
tained, they  will  continue  to  he  a  part  of  the  monev  sup- 
|)ly  hecause  there  is  no  motive  for  their  redemption. 

'JG<>.  Difficulties  of  adjuntintr  suppltj. — Moreover,  it 
would  he  unsafe  to  give  to  Congress  or  to  any  associa- 
tion of  hankers  the  power  to  expand  and  contract  the 
money  su])})ly  artificially.  Congress  's  not  always  well 
iid'ormed  of  the  husiness  needs  of  \he  country;  and 
hankers  must  always  have  personal  and  selfish  interests. 
The  effect  of  a  sudden  contraction  of  the  money  su[)ply 
as  seen  in  panics  is  well  known.  Moreover,  the  power 
to  regulate  the  money  supj)ly  would  include  the  power 
to  inflate  or  de])ress  the  price  level.  We  are  forced  to 
the  conclusion,  therefore,  that  this  credit  has  heen  well 
named  "ideal  money"  1  y  the  theorists;  "ideal"  because 
it  presu])p()ses  a  state  of  technical  knowledge  on  the  part 
of  legislative  hodies  and  .d)sence  of  self-interest  which 
we  may  expect  with  the  millennium. 

Irredeemable  credit  money  may  circulate  at  par  with 
ii,()ld  if  the  issue  is  not  excessive  and  if  there  is  general 
confidence  in  the  goverrmient.     In  this  case  the  govern- 

tiipjit  line  jidf  niviiiiic<>f I  fri  r<i(I(ir>i>)  tho  mnnp^'  Imf  it  fir>f>« 
*'*' i .'* 

SO  in  practice,  receiving  it  itself  at  par  with  gold.  This 
is  not  fiat  money  hecause  it  derives  its  value  not  entirely 

VII  -15 


% 


226 


MONKV   AM)  U.WKINd 


from  its  exchange  utility  hut  from  tlic  /rovcniment's 
actual  redemption.  The  silver  dollar  has  heen  a  good 
example. 

Unfortunately,  however,  government  credit  money 
has  seldom  heen  issued  in  response  to  a  demand  for 
money  as  a  medium  of  exchange.  It  has  heen  issued 
largely  in  resjjonse  to  the  li: ca!  needs  of  governments, 
that  is,  to  meet  extraordinary  increases  in  current  ex- 
})enditures- 

'J()T.  Prrji'diccs  nffdinst  government  credit  monetj 
before  18()1. — This  has  heen  especially  true  of  the 
Ignited  States.  The  Constitution  gave  Congress  the 
power  "to  borrow  money  on  the  credit  of  the  L'nited 
States";  also  "to  coin  money  and  regulate  the  value 
thereof."  In  the  Constitutional  Convention  a  proposi- 
tion to  enable  Congress  "to  emit  bills  of  ciedit  was  de- 
feati'd,  it  being  the  sense  of  the  T'onvention  that  j)apcr 
money  was  dangerous."  The  history  of  the  Ciovern- 
nient  shows  that  the  dislike  (>f  paper  money,  no  dou!)t 
a  survival  of  the  days  of  the  Kevolutionary  bills  of 
credit,  must  have  continued  until  IHOl.  Oti  ordy  three 
occasions  prior  to  diis  time  had  t'casury  notes  becii  is- 
sued, namely,  during  the  War  >f  IHTJ,  the  panic  of 
1S.*{7  and  the  Mexican  AVar  of  ISiT.  ^foreover.  thr 
aggregate  of  these  issues  amounted  to  otdy  $1  I(),()()(),- 
()()().  ;nid  ill  ewry  ease  the  notes  were  interest-bearing, 
and  n(  \ei-  attained  general  circulation. 

'JfiS.  rinanciiif/  tin  ('nil  ii\ir.  The  opening  of  tiie 
Ci\il  War  brought  extraordinary  con(hfioi\s.  Money 
had  to  bi  iaiscd  at  once  tor  eonductiny  the  war,  an<l  in 
laig(  sums.  Should  tlic  (government  "borrow  monev 
on  ilir  credit  of  IIk    Cniled  States,"  or  should  it  create 


iiK'-tiiy    i'V    i-'Siiiiig    its    iiOH  S   ili'tii    C .      iOWiJlg   TiU'lli    Wllil    liic 

legal  tender  feature!'     Tiie  former  it   was  empowered 


(iOVKKNMl.Nr  (  KKDir  (  IHKKSC  V 


in  do  by  the  Constitution  and  could  have  done  by  tlie 
sale  of  bonds.  (io\  ei-nnient  !)onds  are  a  form  of  nov- 
(  rninent  eredit.  i)ut  they  are  not  credit  money,  as  they 
ale  nv)t  payable  on  demand.  The  market  for  bonds  was 
not  o-ood.  however,  and  Conufress  chose  the  latter 
method  as  less  e\i)ensive.  tliou<ih  the  constitutionality 
was  very  doubtful.  It  may  be  objected  that  "the  jmwer 
lo  borrow  money"  inehidi'd  the  liyht  to  issue  notes. 

In  req'ard  to  this  |)oint.  tiie  distinctions  between  cap- 
ital and  money  must  be  kei)t  in  mind.  I'lom  the  busi- 
ness man's  staii(Ii)oint  what  the  (lONernment  really 
needed  was  working"-  capital.  No  business  man  would 
tliink  of  issuing  demand  oblij^ations  in  exchange  for 
eajjital  ^'•oods,  particularly  when  there  was  no  prospect 
of  an  immediate  increase  of  rever-  -e  with  which  tci  meet 
'he  obligations.  The  business  man's  obligations  is- 
M!«(|  under  such  circumstatices  would  be  lon^-time  cred- 
its in  lh<  iOi'in  of  bonds  I'ui-thermoi-e.  there  was  no 
necessity  for  an  increase  in  the  money  supply.  Trices 
were  suthcicnlly  hinh.  What  tlu-  (iovernment  wauled 
was  not  money  but  purchasiiiii'  power  and  this  it  could 
Iiave  l)orrowed  wi'Iiout  increasin;^-  the  supjjJv  of  money 
itself. 

•J(i!).  risddvdiila^Y  of  ^oicnnncnl  dthl. — (iovern- 
nicnt  credit  always  represents  a  ^ovenunent  debt  I'l 
this  coiuitry  \\e  l;a\f  become  so  accustomed  to  havinn 
a  government  debt  that  its  e!cm<  >»  .  of  weakness  ace  sel- 
dom analyzed.  Our  prospciit\  -ratois  point  with  pride 
to  tlic  fact  that  the  I 'nitcd  States  is  the  oidy  nation  in 
liie  world  wbicii  can  sell  lionds  that  pay  cnly  2  per 
rent  inl'ics'.  This  is  applauded  as  an  e\  idence  of  j)ros- 
perilx,  witl.oui  .•ina.hsLS.  wit!"  no  thoupb!  lb;!!  \\>.i-  mvv 
|>resetice  of  a  (h  l)t  on  the  books  of  anvone.  excn  of  a 
nalioii,  must  always  be  a  weakness.     In  what  respect 


( -I 


I 


OOV! 


MOMA    AM)   HANKIN(; 


m 


11 


!i 


should  a  yoxminicnt's  financial  activities  diifer  from 
tliosc  f)t'  a  \\(ll-ic<4ulatc(l  husiiicss'  Do  not  the  same 
principles  nriikrlie  them  hoth' 

The  husiness  man  will  n-^t  horrow  until  lie  has  already 
devised  a  lime  and  method  of  jiaymcnt.  As  we  have 
already  noled.  the  I'orin  in  which  he  will  horrow  depends 
upon  the  disj)()sition  he  wishes  to  make  of  the  credit, 
ir  he  expects  to  add  to  his  fixed  capital,  he  will  horrow 
hv  issuing  lonn-time  credits,  expectin<^  either  to  pay 
them  Milt  of  his  profits  oi-  to  rene\r  them  at  maturity. 
II'  he  merely  wants  the  use  of  funds  for  a  short  time, 
he  will  issue  sliort-time  or  demand  ci'cdits.  These  he 
w  ill  expect  to  meet  out  of  tiie  proceeds  of  his  sales. 

•J7('-  (roirnnnriit  drhf. — When  a  j^-overnni'iit  bor- 
rows it  does  so  for  current  expendituiis.  These  may 
he  for  permanent  imj)rovement.  such  as  federal  build- 
ings, harbors.  caJials,  which  will  benefit  the  public  gen- 
erally and  flu  cost  of  which  should  be  spreajl  over  the 
j)eriod  of  their  usefulness  rather  than  be  met  out  of  'lie 
re\c"iue  of  a  sin^''le  year  at  the  time  of  ex{)enditure. 
.V  fa\()iite  expression  is  "to  let  posterity  ha\e  its  share 
of  till'  burden."  The  ^o\ermnent  bonded  dei)t  in  1870 
•unounted  to  S-_\;{.'n,l()'. >,'.).)(; ;  in  l'.»()-J  it  had  been  re- 
duced to  .^^'.CJ.-i.Ol  l.(;.'ii». 

'i'h(  income  of  a  "^'overnmcnt  is  ;ncnerally  s})oUen  of 
as  re\(iiue  and  is  deiixcd  entirely  from  \ai"ions  methods 
of  taxation.  If  wi'  wish  to  cany  out  the  analogy  be- 
tween the  ^oxeiiiment  and  the  Imsiness  man.  we  may 
say  thai  the  di  Its  iciiccs  bctwce?)  the  rcMiiue  and  ex- 
penditmcs  in  any  one  year  are  profit,  and  that  it  is 
with  this  profit  that  thi'  bonds  are  retired.  The  issue 
of  bo!i(]s,  tlii'ri'! <>re>  \\b<,'!!  the  !>roceeds  a.re  n.ot  souiui- 
(icred,  rests  on  a  firm  business  basis. 


gum:hn.mi:nt  credit  currency 


oo 


on 


The  issue  of  credit  iiioney,  however,  pre.seiits  diff'er- 
riit  j)rol)leins.  When  the  husiiiess  man  issues  demand 
credits  he  purchases  something  sahihle  with  tlie  j)ro- 
eeeds,  and  expects  to  he  in  a  })osition  to  retire  the  crecht 
at  any  time.  The  oovernment  on  the  otlier  hand  merely 
spends  the  money,  usually  to  meet  some  extraordinary 
expenses,  and  then  has  nothing  to  show  for  it.  If  it  is 
a  war  that  has  heen  financed,  as  in  the  case  of  our  green- 
I)acUs,  it  iiad  a  perfect  right  to  horrow  for  the  jjurpose 
just  as  it  would  have  to  make  permanent  improvements 
hecause,  on  the  same  theory,  posterity  should  help  hear 
an  exi)ense  from  which  it  will  henetit.  If  it  does  that, 
however,  a  provision  for  redemption  on  demand  must 
he  made  hy  the  estahlishment  of  a  suflicient  goKl  re- 
serve; hut  to  rest  on  a  husiness  hasis,  more  is  necessary. 
Posterity  should  not  hear  the  !)urden  hy  keeping  the  re- 
serve always  intact  hut  hy  actually  retiring  the  demand 
credits.  l{e<le!ni)lion  in  gold  on  demand  is  not  sutli- 
cient.  These  credits  should  he  canceled  just  as  the 
honds  have  heen  canceled. 

'271.  Demand  dcht.s  a  xccakiicss. — A  deht  is  always  a 
weakness,  hut  especially  so  when  j)ayahle  on  demand. 
it  may  he  well  to  examine  the  claim  made  hy  the  advo- 
cates of  the  issue  of  greenhacks  that  their  issue  would 
result  in  a  saving  to  tlu'  government.  The  argument 
that  turned  the  tide  of  hattlc  in  Congress  was  that  in- 
lerest-liearing  honds  could  l)e  sold  only  at  a  coiisiderahle 
discount,  whereas  the  non-interest-hearing  notes  could 
he  issued  at  j)ai-.  in  otlur  woi'ds.  a  large  saving  was  to 
!»(■  eil'eetcd  \]\  the  intirtst  account. 

In  an  earher  ehaptei-  the  pi-etci-iiice  of  husiness  men, 
who  (Kid  in  aoods  which  air  not  nlwavs  mar'.xctahle.  for 


II 


frg 


jtlll'^    (INll     .sjliirl     Tiiiif    tifinS    Was     iMiiiiiru    iiiir.  i'iii'iiiv   r 


2.'}() 


mo\t:v  and  i?amvI\(j 


i! 


If-- 


more,  it  was  sJunvn  that  tluy  will  often  pav  a  hiolier 
rate  of  interest  on  1„mo-  time  loans  siniplv  to  inake 
tlieir  business  more  seeure.  A  o-,,,,,!  example  of  the 
prelerenee  has  been  shown  I.y  the  issue  of  .$.'J(),0()(),()()U 
1"  J'onds  l,y  Armour  .V  Company  of  C'hicaK,).  Tliese 
bonds  bear  4i  _,  per  eent  interest  and  were  issued  when 
the  eommercial  rate  was  less  than  t  per  eent  in  spite 
of  the  faet  that  Armour  cV  Companv  always  had  a 
ready  nKirket  for  their  short  time  credits  owino'  to  their 
reputation  an.l  the  (piiek  convertibility  of  their  })ro(luct. 
The  -■overnment  does  not  deal  in  "noods  at  all.  j 

only  method  of  meetmo.  oi,lin,,tions  is  by  doin^r  so  (.it 
of  its  excess  of  revenue  over  expenditures  or  by  re- 
f  inuhn-  them.  The  h'rst  must  always  be  a  slow  process. 
In  .ts  ability  to  refund  only  does  the  oovc-nment  have 
:"!  advantau-e  over  the  business  man:  and  even  uiis 
"bdity  may  be  cripple.l  at  critical  times,  so  that  in  re- 
hmdin-  .  loss  greater  by  far  than  the  interest  ori- 
Hinlly  would  result.  It  is  obvious,  therefore,  that  the 
l>'"per  business  policy  would  be  to  avoid  the  issue  of 
demand  cn.lits.  in  spite  of  the  original  savinir  of  ;„. 
tei-est.  " 

•272.  rrovislon.  for  rrfinn:^-  dcht.-  \u  any  event 
iowcNc.-  whether  a  d,  bt  .o  incurred  is  in  the  ■form  of 
I'oiids  or  notes,  provisinu  for  its  can.-ellalion  sluudd  be 
ma.le.  The  smalier  the  d.b'.  the  oreater  the  nation's 
'""•".muin.  pouc...,n.l  tliereisnotcllin^when  thisbor- 
rouinupowermay  beMe..ded.  II  is„..l  a  correct  busi- 
Mcss  pohey  to  aHnu  a  debt  Ineurn  .1  durin-  on<.  period 
"1  stnss  t,,  .villain  o!itstan<lii,n  |,.  ,•<■,  imv  the  ..-.wen!- 
"Hiifs  endit  when  anolinr  p.  rio.l  of  stress  appe;7rs  It 
sl.ould  be  paid  oir  in  prosperous  years,  so  Ibal  when  an- 


1  I 

tin"    S  i  ,■  i  7  1 


ernment's  cndit   unimpaired. 


'Mii  iu-  eic.'-.ii  and  the  j-oy 


CHAPTER  XV 


ECONOMIC  FUNCTION  OF  THE   BANK 


273.  Productive  industries  classified. — The  economic 
life  of  a  coninuiiiity  consists  in  the  production  and  con- 
sumption of  goods.  The  production  of  goods  becomes 
more  difficult  and  comphcated  as  the  wants  of  men 
grow  and  u  great  number  of  auxihary  institutions  be- 
come necessary.  Banking  is  one  of  these  institutions, 
developed  to  assist  in  the  production  of  goods. 

The  institutions  which  carry  on  the  process  of  pro- 
duction may  be  classified  in  three  groups. 

1.  Those  \\hose  purpose  it  is  to  extract  raw  materials 
from  the  earth  and  to  adapt  those  raw  materials  to 
lunnan  wants —therefore,  the  activities  of  agriculture, 
mining,  manufacturing,  etc. 

2.  Those  whose  pvn-[)ose  it  is  to  transport  materials  and 
finished  goods  to  the  place  where  they  can  be  most  ad- 
vantageously used. 

3.  Those  whose  purpose  it  is  to  as.sist  in  transit  rring 
the  ownership  of  materials  and  finished  goods  so  that 
they  may  come  into  the  possession  of  those  persons  who 
can  use  them  most  advantageously  therefore,  the  ac- 
tivities of  retail  and  wholesale  merchaudising,  broker- 
age, coining  and  issuing  money,  banking,  etc.  This 
third  group  of  economic  actiMties  is  not  absolutely 
necessary  to  the  economic  ])roccss  but  is  a  conseiiuence 
of  the  private  ownership  of  materials  and  the  means 
oi'  t>!'()(!!!ct!')!K  u»>dcr  a  thoroutrb  socialistic  regiine  these 
institutions  would  be  Mj[)ertluous. 

S31 


4 


232 


MONEY  AND  BANKING 


274-  lii'iutpihildt'uni  of  fundamental  principles. — 
rndtr  our  present  system  of  private  ownership  of 
weaKli  and  the  division  of  hibor  in  {)ro(hiction,  frecjuent 
transfers  of  ownersliij)  are  i-eiinired.  Kxclianne  is  an 
absolute  prerecjuisite  to  any  hut  the  most  primitive 
form  of  i)ro(hietion.  Only  an  insi<riiitieant  portion  of 
tile  ^j-oods  pnxhiced  are  consumed  hy  tlie  producer;  they 
were  made  to  be  exelian^anl  for  otlier  goods.  In  the 
process  of  manufacture  most  goods  change  liands  many 
times  l)efore  reaeliing  the  consumer. 

These  eleme?itary  economic  facts  are  recapituhited 
for  tlie  i)urj)ose  of  em|)hasizing  the  importance  of  ex- 
change in  our  economic  hfe.  lender  an  economic  sys- 
tem of  private  ])roperty  tliere  could  be  no  civilization 
without  the  means  of  exchanging  one  form  of  propertv 
for  another. 

'''he  exchange  of  one  goods  for  anotlur,  however, 
involves  considerable  diHiculty.  In  any  exchange  there 
must  be  two  parties,  each  desiring  the  article  wliieh  the 
other  wishes  to  part  with,  at  the  same  time  and  place. 
These  conditions  must  coincide  in  order  to  make  an  ex- 
change possible.  These  obstacles  in  the  way  of  l)arter 
led  early  to  the  use  of  money,  whieli  was  a  commodity 
enjoying  so  universal  a  demand  that  everybody  was 
willing  to  accept  it  in  exchange  for  his  goods. 

Jii  order  tli;it  production  shall  be  most  successfullv 
carried  on— that  is.  that  goods  of  the  liighesi  (lualitv 
shall  be  produced  in  the  largest  (juantity.  it  is  necessarV 
that  each  person  shall  be  set  to  do  the  thing  at  whicii 
lie  is  the  most  skillful  and  that  he  shall  be  aliir  to  make 
use  of  the  proper  tools  and  materials.  It  is  necessarv 
that  the  i-apitai  ri'sourees  aiui  the  labor  force  of  the 
country  should  he  l»n>uglil  together  and  organized  in 
the  most   ellicient    way.     The  number  of  persons  who 


KCONUMR    1  LNt  riON   OF  THE  BANK 


^33 


arc  capable  of  heconiinf,''  organizers  of  industry — entre- 
preneurs— is  limited,  and  these  are  not  usually  the  own- 
vvs  of  capital.  If  the  coniniunity  is  to  utilize  the  expert 
abilities  of  these  ca})able  but  i)ropertyless  entrei)reneurs, 
a  method  must  be  pro\idc(l  by  which  they  may  come 
into  possession  of  cajjital  without  bein<r  recjuired  to  give 
an  equivalent  value  immediately.  So  we  have  the  insti- 
tution of  credit,  which  is  the  third  step  in  the  dev.  lop- 
nient  of  exchange — barter,  money,  and  credit. 

27.5.  Credit.— A  credit  is  a  deferred  i)ayment.  In 
exchange  for  valuable  })roperty,  one  of  the  parties  to 
the  transaction  gives  his  promise  to  pay  a  certain  sum 
of  money  in  the  future,  or,  in  other  words,  lie  gives  his 
creditor  the  right  to  demand  a  certain  sum  at  u  future 
time.  The  value  of  this  right  dejjcnds  of  course  upon 
the  certainty  oi'  payment  at  the  future  time.  This  de- 
pends further  upon  the  character  and  ability  of  the 
debtor  and  upon  the  aid  afforded  bv  the  law  in  enforcin<>- 
payment.  A  ci-edit,  therefore,  is  a  contract  to  pay 
money,  and  is  usually  evidenced  by  a  written  instrument 
for  the  further  protection  of  the  creditor  and  for  the 
purpose  of  making  the  contract  negotiable.  The  fact 
that  credits  in  the  form  of  negotiable  instruments  are 
transferable  add  enormously  to  their  utility  as  media 
i>f  exchange. 

27(5.  Jiaiih-  a  dealer  in  credits.— 'Vhv  business  of  a 
bank  is  to  deal  in  credits;  it  is  a  market  for  the  pinrhase 
and  sale  of  credits.  It  is  an  institution  the  fimction 
I  if  which  is  to  assist  in  the  exchange  of  goods  by  facili- 
tating the  use  of  credit  as  a  medium  of  exchange.      It 

is  with  credit  as  with  any  salable  commodity — the  exist- 
...w..>    ,>P    ..    ..... ..l-,.t^    ,..1 :i 1.       Ill  1 I  1 

■::v-.     \ri      ii     ii;.;:  r.-^  ■..      ;-.  ;:-^:l      ;;      i;;;;",       ;;v"     Jiwiigiil      iiiiii     ."XJuI 

increases   its   use  because   a   demand    for   it    is   always 
assured,     lianks  are  an  economic  beneJit  to  liie  commu- 


Rl 


ii'.ii 


^iom:v  and  banking 


Hi 

1 

1 

'■R 

ii 

*p( 

' 

r 
h 


riity  to  the  extent  that  they  promote  the  exchange  of 
goods  and  services,  to  tlie  end  that  the  material  resources 
(capital)  and  the  labor  force  shall  be  most  advanta- 
geously emjjloyed  in  the  best  possible  organization  and 
that  the  finished  products  shall  find  their  way,  with  the 
minimum  of  delay  and  difficulty,  to  the  best  markets. 

Every  excliange.  excejjting  mere  barter,  involves  the 
use  of  a  medium  of  exchange.  Money  and  credit  are 
the  two  media  of  exchange.  The  term  "money"  is  now 
used  by  economists  to  mean  simply  the  standard  of  value 
which,  in  most  countries  to-day,  is  gold.  Where  the 
gold  standard  prevails,  all  other  forms  of  currency — 
token  coins,  government  notes  and  bank  notes — are 
credit  currency.  The  government  usually  undertakes 
to  provide  and  regulate  the  metallic  coinage  of  the  coun- 
try, but  leaves  to  the  banks  the  task  of  providing  and 
handling  the  credit  currencv.  'I'he  Tnited  States  imes 
further  than  most  European  countries  in  concerning 
itself  with  the  credit  currency  of  the  country  by  issuing 
"greenbacks,"  and  Treasury  notes,  and  by  guaranteeing 
the  redemption  of  national  bank  notes. 

In  England,  as  well  as  in  most  of  the  larger  Yaiyo- 
pean  countries,  to  the  banks  is  delegated  the  function 
of  managing  the  credit  cu"rency;  of  course,  under  re- 
strictions more  or  less  stringent.  The  point  to  be 
observed  in  this,  and  one  \\hieh  has  been  urged  by  sev- 
eral of  our  rec^'t  writers  on  money,  notably  C'onant  in 
his  "I'rinciples  of  Money  and  Hanking,"  is  that  the 
iiandling  of  credit,  evi-n  of  credit  currency,  is  properlv 
a  banking  funetio?i  ratiier  than  a  governmental  oiic. 

Credit  jis  a  medium  of  <  xchani.  <■  varies  in  form  all 
the  way  from  a  national  bank  ooti ,  whicli  na.sses  from 
hand  to  hand  as  freely  as  a  gold  coin,  to  a  mere  verbal 
promise  tr>  pay  (.  \  idcnccd  by  a  niemora!idum  in  a  ledger 


ECUNUMIC  FLNCTIUN   OF  THE   BANK 


235 


wliich,  often  as  it  has  served  in  one  excluingc,  is  but 
rarely  negotiated  further.  ^Vrranged  in  the  onkr  of 
their  negotiahihty  (tlieir  servieeabihty  as  nie(ha  of  ex- 
cliange)  between  tliese  two  extremes,  we  liave  the  cer- 
titied  cheek,  cheek,  draft,  l)ond.  ])roniissory  note,  etc. 

277.  lianlcs  supplij  a  medium  of  iwclian^c. — Hanks 
perform  the  function  of  sup|)lying  a  me(hum  of  ex- 
change in  two  ways:  (1)  by  the  issue  of  hank  notes 
intended  I'or  general  circulation,  as  the  national  bank 
notes,  and  (2)  by  granting,  in  exchange  for  a  cash  de- 
])t)sit  or  an  interest-bearing  note,  its  own  credit  which 
can  be  used  by  the  customer  as  means  of  payment  by 
drawing  a  check  against  the  bank. 

The  function  of  providing  a  medium  of  exchange 
for  a  community  is  essentially  a  public  one  and  is  pecul- 
iarly liable  to  abuse  if  left  without  restriction  in  the 
hands  of  private  parties.  Before  the  Civil  War  this 
country  suffered  severely  from  badly  regulated  issues 
of  bank  money  and,  since  the  National  Bank  Act,  the 
right  to  issue  paper  money  has  been  limited  to  national 
banks  under  very  strict  regulations. 

278.  Hanking  is  a  quasi-public  function. — The  right 
to  furnish  a  medium  of  exchange  by  the  system  of  checks 
and  de]>osits  still  belongs  to  every  bank,  but  in  all  cases 
it  is  regulated  cither  i)y  federal  ov  state  statutes.  In  the 
Ignited  States  minimum  cash  reserves  are  re(iuiri(l  to  be 
kv\)[  and  in  many  other  ways  the  i)iiblic  nature  of  the 
business  is  recognized. 

Besides  the  quasi-public  function  of  jiroviding  a  me- 
dium of  exchange  by  the  use  of  credit  in  one  form  or 
nnother,  banks  liave  anotht  r  function  closely  allied  to 

if-       titlfl       <.-<\«>tjitll^^i>(.'       (.'/Id  l>f  1/  ill'      4-(t       l\it      jIi 


.^:., ,„..:. I. ...J   I- 


to  supj)ly  temporary  capital  to  industry  in  the  form  of 
short  time  loans. 


'JIG 


MONEY    AM)    RANKING 


In   th 


'd>j;(-\  scarce  any  iiuhistrv  can  ht-  carried 


(Ul 


without  capital.  It  is  very  rare  also  that  the  best  pn; 
iiioters  and  managers  of  industry  are  tlie  i)ossessors 
of  the  large  am  unts  of  capital  necessary  to  carry  on 
the  business.  On  the  other  hand,  a  large  })()rtion  oi'  the 
country's  capital  is  in  the  hands  of  those  who  have  no 
ability  to  emj)loy  it  successfully  or  it  is  scattered  about 
among  tiie  people.  To  get  this  cai)ital  into  the  hands 
of  the  entrei)reneun  ..iio  can  employ  it  most  profitably 
is  a  function  largely  assumed  by  banks. 

•271).  Tin-  hank  a  (li.stribiitor  of  capital.— Cainial  is 
employed  in  iiidustry  in  two  ways.  Some  of  it  must  be 
invested  in  the  plant  and  machinery;  this  is  fixed  cap- 
ital. Another  installment  must  be  invested  in  materials, 
labor,  incidental  exj)enses  of  production,  etc.,  the  neces- 
sity for  M-hich  arises  out  of  the  length  of  time  required 
to  manufacture  and  market  the  product.  There  is 
naturally  great  variation  in  the  length  of  the  period 
of  production  in  the  various  industries.  In  some  of 
them  this  circ'  ;ting  capital  must  be  tied  up  for  Meeks, 
in  others  i'or  wars. 

The  distinction  between  circulating  and  fixed  capital 
IS  that  the  former  ai'ter  a  period  reappears  in  the  form 
of  a  salable  {)roduct  from  which  is  realized  the  value  of 
capital  invested  and  something  more  in  such  shape  that 
it  can  be  reinvested;  in  other  words  it  is  fluid,  whereas 
Jixed  cai)ital  remains  in  the  form  in  which  it  is  invested 
and  only  l)eeomes  fluid  as  a  replacement  or  depreciation 
fund  is  accumulated  or  the  plant  is  sold. 

This  distinction  has  gre.it  value  in  the  science  of 
banking,  for  as  we  shall  see  later,  the  credit  which  a 
bank  loans  has  a  very  precarious  existence  and  it  may 
become  necessary  to  withdraw  it  at  any  moment  from 
the  enterprise  iti  which  it  is  invested.     The  restrictions 


K(  ONOAIIC   1  TNCl'lON   UF  THE   HANK 


j>;i' 


wliicli  leoislal  n\  has  placed  njxm  the  nianiicr  of  loans 
a  l)ank  may  'iiakc  are  vciilly  hased  upon  this  j)rinciple. 

2S().  Ihuilcing  priuciplc. — A  lar^a-  proportion  of  the 
hank  failures  of  the  country  is  caused  hy  a  violation  of 
this  fundamental  hanking-  principle.  The  National 
Hank  Act  forhids  hanks  to  loan  on  real  estate  or  mort- 
oaacs.  The  idea  hack  of  this  i-,  to  ])revent  the  lockin<; 
up  of  funds  ii  fi  1(1  capital.  The  faihu'e  of  the  three 
Walsh  bai.  s  in  Chic'^o  in  V.m\  occurred  hecause  the 
funds  of  tlic  hanks  had  been  used  to  huild  railroads 
which  some  dav  mav  he  \erv  i)rofitahle,  but  which  for 
the  present  tie  up  capital  where  it  cannot  he  easily 
turned  ijito  a  means  of  payment. 

The  reasons  why  hatdv  funds  should  not  he  tied  up  in 
the  form  of  fixed  ca[)ital  are: 

(1 )  The  value  of  the  investment  may  he  unstable. 

(2)  The  value  of  the  investment  may  depend  on  the 
completion  of  the  whole  plant,  as  in  Hie  case  of  the 
Walsh  railroads. 

(3)  The  value  of  the  investment  may  depend  upon 
a  monopoly  or  upon  the  ability  d'  >  ;ie  man,  so  that  if 
the  peculiar  advantage  ceases  to  exi^  the  property 
shrinks  in  value.  New  processes  may  nuike  old  plants 
entirely  obsolete  and  destroy  their  value. 

281.  Double  function  of  commcrcinl  hanhs. — The 
function  of  a  modern  commercial  bank  is  therefore  two- 
fold: (1)  To  provide  a  means  of  payment  and  (2) 
to  provide  temporary  capital  for  the  use  of  industry. 
It  will  perhaj  s  he  well  to  show  brietly  how  these  func- 
tions were  developed. 

One  of  the  early  banks,   the    liank  of  Amsterdam 

was  the  conmn  rcial  center  o\'  Europe  at  that  time,  and 
the  currency  in  circulation  was  a  heterogeneous  mass 


1       .; 

I 
I 


L'.'JH 


MOXKV  AND  RANKING 


of  the  coma-c  of  all  the  mio-hhorin^v  and  .h'stant  conn- 
tnes,    of    murrtain    \ahic    a..,l    f'miuentlv    Mmtllated 
S.K'h  a  currency   seized   the  needs  of  connneree  ^cvv 
I'a.Ily,  and  the  J^mk  of  Anistenh.n,  uas  oroani/.e,:  to 
reheve  the  diHicnHy.      It  received  deposits  of  this  niis- 
c-elhmeous  currency,  calcuhited  its  vahie  on  the  })asis  of 
a  fixed  stanchu-d  and  permitted  the  depositor  to  transfer 
l'>s  credit  at  the  hank.     The  deposits  were  all  kept  in- 
«act  in  the  l)ank,  or  at  least  were  supposed  to  he      As 
;i  matter  of  fact,  the  si^rht  of  so  much  idle  money  seem- 
I'l^ly  doui^r  no  ^rood  to  auyhodv  in  time   proved  too 
stron^r  a  temptation  to  the  mana-enipnt  and  thev  from 
time  to  time  ])ermitted  lar-e  sums  to  he  used  in  'financ- 
ing,^ hazardous  ventures,  principallv  the  colonial  enter- 
prises of  the  Dutch  Kast  India  Company.     When  these 
tacts  hecame  notorious  the  depositors  lost  faith  in  the 
hank  and  it  was  compelled  to  suspend.     This  hank  per- 
lormed  a  hankino-  function  in  diat  it  provided  a  ^.ood 
iriedium  of  exchanoe,  h„t  it  did  not  deal  in  credit  in 
any  other  sense  than  a  -rain  warehouse  man  mIk)  is  sim- 
])ly  under  ohii-ations  to  return  the  deposit  on  demand. 
_    In  the  IJank  of  Knu-hmd   {nm}   we  find  the  hunk- 
in^r   i  unctions   considerahly  developed.     In   considera- 
tion of  a  li)an  to  the  ^nnernment,  which  at  that  time  wis 
m  sore  need  of  tunds,  the  suhscrihers  were  given  the 
exclusive  right  to  organize  a  hank  which  should  have 
the  privilege  of  issuing  notes  payahle  to  the  hearer  and 
which  were  intended  to  circulate  as  currency. 

Here  we  have  the  essential  element  in  "hankino-— an 
organization  which  is  ahle  in  some  way  to  create  credit 
at  small  expense  and  which  it  may  loan'out  to  the  puhlic, 
deriving  an  income  therefrom  which  leaves  a  nrh  nrofif 
above  expenses.     In  other  words,  the  bank  is  able  to 


1!^- 


ECONU.Mh     1LN(   IIUN   Ul'    IHI-;   HANK 


ii'.i\) 


])ro(luce  somcthir;^'-  cheaply  and  to  rent  it  out  at  a  (rr- 
taiii  rate  per  cent.  The  f'ollouiu^tr  features  were  a  part 
ni'  the  creation  of  the  credit  of  the  Hank  of  Kn<>'la(id: 

(1)  A  siihseriptioii  of  funds  nhieh  sliould  he  loaned 
to  the  ^oveniuient  al  8  per  cent. 

(2)  Notes  must  he  jirinted,  counterfeitintr  guarded 
a<,''ainst,  an  othce  for  doin<,r  husiness  and  redeeming  the 
notes  must  he  maintained. 

(.'J)  A  demand  for  currency  nrust  exist  so  that  the 
notes  will  n^main  oulstandiiiir. 

282.  Peculiar  privilege  of  hankers. — There  arc  a 
^reat  many  persons  and  firms  who  can  create  credit,  hut 
the  hanker  is  the  only  one  ahle  to  dei-ive  an  income  from 
loaning  it  out.  The  reason  of  this  is  that  the  hank- 
credit  is  in  such  form  that  it  can  he  used  as  a  means  of 
payment  and,  therefore,  will  he  received  and  held  by 
the  puhlic  so  long  as  there  is  need  for  it  to  do  the 
necessary  work  of  exchange. 

Naturally  a  husiness  in  which  the  stock-in-trade  can 
he  produced  at  very  little  expense  and  can  be  loaned 
out  at  from  5  i)er  cent  to  2.5  per  cent  per  annum  is 
peculiarly  attractive  and  liable  to  abuse.  Until  the  pas- 
sage of  the  National  ]Jank  Act,  the  United  States  had 
to  suffer  many  and  heavy  losses  through  the  insulficient 
regulation  of  this  important  function.  It  took  us  all 
those  years  to  learn  that  the  function  of  supplying  the 
I'urrency  of  the  country  is  a  pul)lic  one  and  should  he 
delegated  to  private  parties  only  under  the  most  strin- 
gent regulations. 

lender  our  present  laws  the  privilege  of  issuing  bank- 
credit  to  be  used  as  currency  (the  national  bank  notes) 
posts,  the  hank  nearlv  ss  much,  as  th.e  incojiu^  derivcf! 
from  loaning  the  notes  and,  furthermore,  a  Inrgc  part 


uw 


MONEY   AM)  BANKING 


of  the  con II try's  need  for  credit  currency  is  supplied 
by  the  <4-overniiient  itself  hy  issues  of  "greenbacks"  and 
Treasury  notes. 

liy  far  the  largest  portion  of  the  payments  in  ])usiness 
trnnsaetions  are  made  by  the  use  of  credit  in  another 
form  than  currency,  that  is,  1  means  of  the  check  or 
draft.  'J'he  service  of  the  banks  in  providing  currency 
is  really  insignificant  when  compared  to  their  service  in 
furnisliing  a  method  of  j)ayment  by  click. 

The  essi'iitial  element  in  the  e!.cck  system  is  the  same 
as  in  the  bank-note  system,  viz.,  bank  credit.  Instead 
of  selling,  or  more  jjroperly,  loaning  its  credit  in  the 
form  of  baidv  notes,  at  a  certain  rate  pf-r  cent,  the  bank 
loans  the  right  to  draw  checks  against  it,  which  checks 
can  be  used  as  a  means  of  payment,  but  to  a  much  more 
limited  extent  than  bank  notes  and  with  a  much  more 
restricted  circulation.  The  principle  underlying  both 
systems,  however,  is  the  same. 

The  |)eculiar  cliaracteristic  of  a  bank  is  the  privilege 
of  using  its  credit  as  a  medium  of  exchange.  This 
gives  its  credit  a  utdity  enjoyed  by  the  credit  of  no 
other  organization  except  the  government.  IJecause 
its  ci'edit  has  this  uiiHty  it  can  be  kept  outstaiiding  witli- 
out  the  i)ayment  of  interest.  The  principal  business  of 
the  bank  is  to  exchange  its  own  credit,  in  the  I'orni  of 
baid<  notes  or  a  deposit  credit  oti  its  books  against  which 
chicks  may  be  drawn,  for  the  i-redit  of  someone  else  in 
the  form  of  a  promissory  note  bearing  interest.  ( 'nder 
ordinary  eircnmstanees  neiiner  the  bank  ?iotes  nny  the 
deposit  credits  beai'  interest,  conse(iuentl'-  Ihe  banK  "-ains 
i)y  the  Iransaetion  a  gross  jirofit  e(]nal  to  tiie  interest 
on  the  pro;iiiss(«iv  note.  In  order  to  make  this  j)rofit 
it  is  necessary  Ui.tl  thr  bnnk-"redit  should  be  kept  ouf- 
standini^  and  not  be  returne(i  to  the  liank  for  payment. 


ECONOMIC  ruNcnox  OF  Tin-;  hank 


^n 


Credit  is  simply  a  deferred   payment  and   this   hank- 
i   '.  'it  represents  a  payment  dne  at  any  time  the  posses- 
eliooses  to  call  for  it;  if  it  is  in  the  form  of  a  hank 
0  lie  may  present  it  for  redem|)tion  in  eash;  if  it  is 
...  the  form  of  a  dei)osit-ere(ht   he  may  (h'aw  a  check 
and  casli  it  at  the  l)ank.      Now,  if  hank  notes  were  re- 
deemed soon  after  their  issne.  or  if  deposit-erefhts  were 
elieeked  a<rainst  and  the  checks  caslied  soon  after  the 
cre(ht  was  granted,  tiie  hank  wonid  not  he  ahle  to  keep 
its  credit,   having  no   interest   ontstaiuh'ng.     It   wonM 
gain  the  interest  on  the  promissory  notes  purchased  hnl, 
since  it  liad  to  pay  cash  for  them  ultimately  hy  redeem- 
ing the  outstaiuhng  cretht  given   for  them,  the  whole 
transaction  woidd   he  e(iuivalei:t   to  loaning  money  at 
the  current  rate  of  interest,  nothing  mo:     or  less. 

In  actual  practice,  however,  the  hank  is  not  compelled 
to  redeem  its  credit  in  cash  immediately,  hut  is  ahle  to 
keep  it  outstanding  for  some  time.  In  case  the  hank 
puts  out  its  credit  in  the  shape  of  hank  notes,  the  puhlic 
need  for  currency  keeps  them  circulating  from  hand  to 
hand  and  serving  the  same  j)urpose  as  money;  as  th-jre 
IS  no  need  to  exchange  them  for  money  the  haid<  is  not 
<alled  upon  to  redeem  t;  em.  However,  this  no  longer 
applies  to  hanking  in  the  Tnited  States  since  the  \nW\- 
lege  of  issuing  hank  notes  freely  has  heeti  taken  away 
I'rom  the  hanks  hy  the  National  Hank  /Vct. 

I  nder  the  jjreserd  system  of  hanking  in  this  country 
the  hanks  can  i.o  longer  put  out  their  endit  in  the 
form  of  hank  noles.  cxeepi  ii<  the  case  of  national  hank 
notes  where  the  restrictions  u|)oi>  their  issue  aic  so  many 
that  their  .haraefer  is  (|uile  ehang-d;  they  [io  longer 
rej)rescnt  the  credit  of  \hr  issuing  hank  hut  the  ere.Iit 
of  the  goxernmeni  in  the  shape  of  a  I  'nited  Sl.ihs  hond. 
Having  hern  deprived  of  thi-  one  method  of  kee,)!n" 


I  i 

III 


HI 


\!l       Hi 


O  It) 


MONEY  AND  BANKING 


11! 


their  credit  oiitstaiuliiig  by  the  issue  of  bank  notes,  the 
banks  have  made  use  ol'  another  nietliod,  the  cheek  and 
deposit  system,  which  serves  the  same  purpose  but  which 
is  more  dilJicull  to  understand. 

•JH.'J.  liduJcs  ill)  not  create  cdpital. — Dunbar  says  in  liis 
little  book,  "The  Theory  and  History  of  Banking": 

It  I?  obvious  thfit  tlic  hankers  cn'dtc  no  luw  cajiittil  by  their 
letidin^  and  deposit  lioldiii^-,  \n\\  it  is  e(iiial!y  plain  tliat  the\' 
direct  tlie  stream  of  (';;pital  to  the  enterprises  and  industries  re- 
(juirinij;  such  support,  and  fliat  tl  \  quicken  the  succession  of 
{•onunercial  and  iii(lu>ti'ial  opirat ions.  A  ^ivcn  amount  of  caji- 
ital  is  tiuis  made  more  elt'ective,  so  tisat  the  re>ult  of  tlie  introduc- 
tion of  liankiiif;-  in  anv  conununitv  is  the  e!iu!val<  nt  of  a  coiisid- 
erahle  increase  of  capital,  althoujj;h  not  implying  any  real  increase 
in  the  tir>t  instance. 

Indrstry  is  impossible  without  two  things:  Capital 
and  ni  iiaoement.  \\'ry  frecjuently  the  class  of  per- 
sons owning  the  capital  are  not  capable  of  employing 
it  in  industry  to  the  best  advantage,  and  many  |)ersons 
of  ability  have  no  caj)ital.  It  is  the  function  of  the  l)ank 
to  bring  the  two  together  for  their  mutual  advantage 
and  thus  promote  industiy. 

It  is  important  to  get  the  distinction  between  capital 
and  eapUal  goods.  Capital  goods  are  those  material 
things  which  are  employed  in  the  further  production 
of  goods,  such  as  iiachincry.  factoiy  buildings,  raw 
materials,  and  goods  in  the  hands  of  merchants.  Cap- 
ital is  a  certain  sum  of'  vahr  so  many  dollars  worth 
from  uhi<h  the  person  owning  it  expects  to  get  an  in- 
come. Capital  goods  wear  out  and  <lisappear.  but  i  i])- 
ital  survives  in  tlii'  form  ol"  rej>laccmcnt  and  sitiking 
funds  undir  normal  conditions. 


EC'ONO.AIIC  FrXC'I'lOX  OF  'i'lIK   HANK  x>l;3 

A  fju'toiv  iiKiy  he  turning-  out  sonic  form  of  capital 
uoods     iiKu-liiuery,  for  example— and  at  the  same  time 
there  may   l)e  entrepreneurs  desirin^r  to  make  use  of 
!hat    maelunery    in    ])ro(luction    hut    liavin^r    no    ready 
linids.      J'he  inakers  of  the  machinery  cannot  ])art  with 
the  machinery    mdess  they  ^et  some  form  of  medium 
nf  exdiano'c  nitli  which  to  pay  the'r  hills  for  waoes, 
tnaterials,   etc.      The   hank   ste|)s   in   at   this   point   and 
<  iiahles  the  two  parties  to  ,<ret  to<,a.ther  to  the  advanta^re 
"f  hoth  themselves  and  the  community.     The  maclMnery 
company  cith-r  takes  a  note  from  the  entrepreneur  anil 
uets  it  discc   ,it(.  '  at   the  hank,  thus  chan<rin<r  a  non- 
'■irculatin<v  I'orm  of  credit  into  a  medium  of  exchan^re 
with  which  they  can  j)ay  their  hills,  or  they  sell  the  ma- 
chinery on  time  and  horrow  from  the  hank  enou^dt  to 
pay  running  expenses  until  the  account  shall  have  hc- 
t  "me  due. 

rroduction  requires  a  laj)se  of  time  and  the  owners 
iif  the  cai)ital  employed  must  wait  until  the  goods  pro- 
duced arc  sold  hcforc  they  can  get  hack  their  capital. 
The  hank  takes  the  hurden  of  waiting  from  thos'  who 
liavc  to  emj)loy  their  capital  more  rapidly  and  places 
li  on  those  who  are  content  to  wait  so  long  as  thev  get 
in  incorjie  for  it. 

•J'<lk  Soiinr  of  ('u/)iltil  ami  crcdif  of  hank.  'Vhc 
sources  nf  the  capital  and  ciedit  which  is  the  stock  in 
iiadc  of  the  haid<:  (1)  C'ai)!tal  stock  suhscrihed  hy 
stockholdirs,  and  CM  di|)o>it.s  of  cash.  On  the  hasis 
"f  the  funds  thus  i)rM\ided  tin  hank  is  ahle  to  create  a 
•n-^^v  amount  cd'  credit  which.  '\hcn  loaned  to  entrepre- 
I'urs,  serves  the  purpose  of  actual  ca|)ital  hecause  with 
'  they  can  p";(liase  the  capiial  goods  thev  re(|uire. 
I  redit  is  a  si  'slitute  for  monev  in  makin<>  e\rlian"es 


\H 


2^i 


MONKY   AM)  BANKIN(i 


and  may  be  comijared  to  airships  which  in  tlie  near 
future  may  reiuler  superfluous  raih'oad  tracks  and  right- 
of-way. 

2H.5.  Opirdliun.s  of  (i  hanJc. — Tlie  Dperations  of  a 
l)aiik  aie  tiiree:  Discount  or  loaning,  deposit,  and  issue. 
In  diseoiMiting  or  loaning,  the  bank  buys  from  the 
customer  a  m  ii-cireulating  crc(ht  in  the  form  of  a  prom- 
issory note  and  ])ays  for  it  with  cash  or,  what  is  much 
more  l're(iuently  the  case,  with  its  own  credit  in  the  form 
of  bank  notes  or  a  (kjjosit  crecht,  either  of  whicli  are 
cii-eukiting  and  can  be  used  as  a  me<lium  of  exchange. 

In  (kahii''-  \\\[]\  the  bank  the  customer  niav  either 
sell  (discount)  notes  of  other  peojjle  which  he  has 
taken  in  trade,  or  he  may  sell  iiis  own  note  with 
these  trade  note^  as  collateral  security,  or  he  ma\ 
sell  his  own  note  with  or  witliout  some  collateral. 
Wv  have  now  to  consider  what  it  is  that  the  bank 
gives  in  exciiange  for  the  right  to  demand  and 
rec'cive  monex'  at  a  future  time  which  is  ae'[uircd  by  it 
under  tliesc  circumstances.  In  the  case  of  discount  the 
])!()ci'eds  of  the  discounted  note  (face  value  less  inter- 
est )  are  placed  to  the  credit  of  the  customer,  to  be  drawn 
out  by  him  by  means  of  checks  to  suit  his  convenienct 
The  customer  has  given  the  bank  the  right  to  demand 
funds  IVom  him  at  a  definite  future  time  in  exchange 
for  the  light  to  dtinand  I'unds  from  the  bank  at  any 
time. 

The  item  "indi\i(hial  de])osits"  in  a  bank  statement 
does  not  inipl\'  that  per'^ons  ]\nw  deposited  cash  to  that 
amount  in  the  bank;  some  of  it  of  couise  represents 
cash  de|)ONited.  or  checks,  drafts,  itc.,  deposited  for  col 
lection  which  are  e(iui\alenl  to  cash;  but  the  greatest 
proportin;!  represinls  credits  \\hieh  have  \kv\\  sold  by 


ECONOMIC  FUN(  TION  OF  THE  BANK 


J24r> 


the  bank  in  exchan<>-  or  non-ciiviilatin^  forms  of  credit, 
i.  e.,  proinissoi-y  notes,  eoininereial  paper,  etc. 

A  bank  note  is  a  form  of  demand  lial)ility  sold  i)v  tbe 
iiank.      It  is  simply  the  evidence  of  tlie  debt  of  the  ]rdi\k 

the  same  as  an  entry  in  a  bank  l)ook  showing  that 
whoever  possesses  it  can  claim  from  the  bank  a  certain 
^  im.  The  system  of  checks  and  deposit  is  a  snlistitnte 
tor  bank  note  issues  and  developed  out  of  them.  Kny- 
md  and  the  T'.iited  States  are  the  oidy  countries  mak- 
ing extt  -live  ..>e  of  the  system,  the  contine?ital  countries 
still  ciingin<r  to  tlu  hank  note. 

Ju  the  oj)erations  we  iiave  been  considering  the  sub- 

(ct  matter  involved  is  in  everv  case  t  ither  money  or 

contracts    for    the   payment    thereof,    vi/.,    credit.      \o 

for   I  of  dealing  in  mercl'.andise  or  real  pro^jcrty  comes 

roperlx  within  the  field  of  banking. 

28(».  Jicspon.sihiliti/  of  ilic  JxuiJ.cr  for  proper  distrihu- 
lion  of  nipitdl.-  Mr.  C'onant  says  in  his  "l*rinciples  of 
Money  and  l?aid<ing": 

It  is  in  (li^t^il)^lti^^  between  dipositors,  borrowers,  ami  his  own 
vaults  tlie  nioni'V  intrusttd  to  him  by  depositor.^  in  siidi  a  inan- 
inT  tliat  hi'  sliall  !)(■  able  to  rcp.iy  it  aecordiiin'  to  bis  promise, 
that  tlie  most  rjilieate  and  important  fnmtiem  of  tlu-  banker 
arises.  If  ;s  in  the  e\  'iliini  of  thi>  function  that  I  be  modein 
banker  ha  become  the  arhitei-  of  the  direction  of  investment,  the 
lU'^ani/ation  if  industry,  and  even  of  the  fate  of  nations.  Sim- 
ple as  the  process  i>  by  whii'h  the  banke  r  tran-lVrs  to  others  the 
-lored  purchasing  power  «hich  he  has  itluied  up  in  small  de- 
posits from  his  customers  who  have  aicpiired  i^old  or  tbe  right 
'o  command  gold,  it  is  bis  selection  among  tliese  borro-sei's  wbicb 
determines  the  cour-e  of  tbe  industrial  progress  of  the  nation. 

lit  lu-e  it  comes  tbat  Ibe  bank(r.  in  tbe  t"nancing  of  important 
enter})rises,  can  within  certain  limits  dtterniine  «hetb(r  a  given 
project    shall    succeed    or    fail.      In    e\erv    growing    commuiuty 


/. 


u 


uw 


MONEY  AM)  IJAMvING 


!;;» 


flu 


!• 


ii 


nuu'li  of  the  rial  hurdi  ii  of  dccidiiig  iij)()ri  tlie  course  of  its  fuhire 
di'vclopnioiit  liis  with  the  liankcr.  It  is  for  him  to  (letcrniiiie 
the  relative  iiiar<rinal  iitihtv  of  one  enterprise  as  compared  with 
aiiotlier  and  to  ^rant  liis  suj)port  to  the  enterprise  wh.ich  promises 
the  hi<;hest  utility  and  therefore  the  most  certain  })rofits.  'J'luis 
there  rests  upon  the  hanker  in  a  sense  the  vital  function  of  trus- 
tee for  tlie  couHTiiuiity  in  its  dealings  with  itself.  This  trustee- 
ship is  especially  sacred  if  he  deals  with  the  money  of  others,  us  is 
usuully  the  case,  and  not  purely  w  ith  money  of  his  owi  . 

The  peculiar  nature  of  a  l)aiik  and  the  close  relation 
existino-  hctween  It  and  the  economic  welfare  of  the 
community  is  hrought  out  clearly  when  a  i'ailure  occurs. 
In  the  case  of  an  enterprise  of  a  more  private  character 
— a  manufacturini^-  or  mercantile  concern--a  failure 
does  not  ordinarily  hiino-  such  disastrous  results  as  the 
I'ailure  of  a  hank,  hecause  the  ])arties  injured  expected 
to  take  a  lisk  and  usually  have  means  of  protecting 
themselves. 

A  haidv  failure,  on  the  other  hand,  throws  a  direct 
loss  on  a  ^real  many  i)eopIe  who  have  not  calculated 
on  any  risk,  l-'urtheiinorc.  tluie  is  an  indirect  loss  of 
confidence  in  hanks.  This  leads  people  to  withdraw 
their  deposits  and  ^o  hack  to  the  more  |)rimitive  and 
expensive  melhods  of  t  xclianoe,  thus  relanlino-  the  eco- 
noiiiie  (kvelopmenl  oj'  the  <'oimtry. 

Our  i)rosperity  is  owino'  to  a  laroe  extent  to  the 
devices  which  make  exchange  easier  and  cheaptr,  just 
as  hetter  railways  aful  steamships  increa;ie  our  welfare 
hy  |)r(/molino'  that  form  of  exehanoe.  Hankino^  de- 
vices, the  use  of  ejieeks  against  deposits,  etc..  are  jiist  as 
imi)()rtant  as  inventions  which  help  to  annihilate  dis- 
tance. 

The  hanks  lia\c  so  impoitint  a  role  io  play  in  th.e 
disjHisition  of  the  eirenlatino^  capital  o!'  the  ecimtry  that 


ECONOMIC  FUNCTION  OF  THE  BANK 


247 


they  can  cause  a  very  serious  complication  when,  by 
departing  from  the  true  rule  of  banking  and  in  hope 
of  gaining  large  profits,  they  invest  these  circulating 
i'unds  in  enterprises  of  a  speculative  character  and  by 
so  doing  convert  circulating  into  fixed  capital. 


CHAPTER  XVI 

DEPO.SJT  LLHUKNCY 

287.  Auahisls  of  credit. ~ A  bank  loans  its  c-redit,  as 
a  ^reneral  rule,  rather  than  cash.  Wv  shall  have  to  prove 
tills  statement,  for  the  averane  banker  will  insist  that  he 
loans  cash. 

Credit  IS  the  promise  to  pay  money  at  a  t'ntnre  time 
and  arises  out  of  an  exehanoe  in  whieh  proj)erty,  serv- 
ices, or  some  valuable  thino-  is  exchanged  against  a 
promise  to  pay  an  e(inivalent  value  in  the  future.  The 
transaction  is  not  complete  until  the  promise  is  dis- 
charo-ed.  A  c^dit  is  created,  therefore,  by  a  transfer 
of  value  which  is  ,till  incomplete,  one  of  the  |)arties  as 
yet  not  havino-  pcrCormed  his  part  of  the  contract;  \u 
lieu  of  property,  the  second  j)arty  oives  the  right  to 
receive  I'rom  him  value  at  some  future  tinie.  Having 
l)een  once  created,  this  credit  ''."s  right  to  receive  value 
— is  regarded  as  piojierty  and  may  be  transferred  as 
any  other  form  ol'  property  is  transferred.  Wiioever 
posstssis  the  legal  right  to  receive  this  value  may  de- 
mand it  of  the  debt*  ■  when  it  is  due. 

As  a  medium  of  exchange,  credit  is  su))erior  to  stand- 
ard money  in  that  it  does  not  involve  the  transfer  of 
mtrinsically  valuable  commodities  pi-oduccd  at  great 
cost.  'I'hf  function  of  the  bank  is  to  promote  the  use  of 
this  incxpeiisive  substitute  for  standard  money  credit, 
it  does  so  by  atfording  a  marki-t  wherein  credits  can  be 
bought    .ind   sold.      A    tyi)ical    illustration   of   tiiis   im- 

L'  IS 


IV 


DEPOSIT  CURRENCY 


249 


])()rtiitit  service  to  the  business  of  the  community  is  as 
I'ollows: 

'2HH.  Ilutc  credit  promotes  indnstri/. — The  process  of 
|iro(luein^r  from  the  raw  material  a  cotton  garment  he- 
lore  it  reaches  i.  i  consumer  re({uires  months  of  time 
and  the  i)artici))ation  of  many  separate  industries, 
riie  raw  cotton  must  he  grown  from  the  seed,  ginned, 
lialed,  transported,  carded,  s[)nn,  woven  into  cloth,  cut 
and  sewed  into  the  form  of  the  garment,  transported, 
and  sold  to  the  johher,  then  to  the  wholesaler,  to  the 
retailer,  and  tinally  to  the  consumer.  Practically  every 
step  involves  an  exchange  in  which  a  quid  pro  quo  is 
necessary.  For  example,  u  cotton-mill  owner  cannot 
perform  his  part  in  the  chain  or  })roduction  unless  he 
can  possess  himself  of  the  raw  cotton  and  hold  it  long 
enough  to  make  it  into  cloth.  If  he  has  no  equivalent 
to  exchange  for  the  cotton,  he  is  esto{)j)ed  from  business. 
The  owner  of  the  raw  cotton,  ])erhaps,  cannot  wait 
sixty  or  ninety  days  for  his  pay  atid  he  cannot,  therefore, 
accept  the  credit  of  the  mill-owner  in  exchange  unless  he 
can  sell  that  criMlit  for  casii.  'J'he  credit  of  tiie  mill- 
owner,  in  the  form  of  a  promissory  note,  is  not  a 
medium  of  exchange  which  the  cotton  dealer  can  use  to 
[)ay  his  obligations.  The  bank,  however,  stands  ready 
to  buy  that  nole  and  give  for  it  something  which  can  be 
used  as  a  mearis  of  })ayment.  The  bank,  a  market  for 
negotiable  commercial  j)a])er,  has  made  possible  the  ex- 
change of  cotton,  and  the  industry  of  the  country  has 
been  aided,  liecaiise  a  market  for  credit  exists,  ex- 
changes can  take  place  which  w(;uld  otherwise  be  im- 
j)ossible. 

2S0.  liciks  create  credits. — besides  furnisliing  a 
market  lor  ci'cdits  already  in  existence,  banks  engage 
!.n  transactions  in  w  hich  ciedits  are  created  by  receiving 


i 


^r.o 


MONKV  AM)  H.\NK1N(; 


.1 


(Itj)o.sits  and  niakiii^r  loans.  In  exchange  for  cash  de- 
I)<)site(],  the  depositor  receives  the  promise  of  the  hank- 
to  repay  the  sum  on  demand.  Tliis  is  evidenced  hy 
an  entry  in  the  pass  hook  of  the  depositor.  The  hank 
redeems  its  ])romise,  eitlier  partially  or  entirely,  when- 
ever it  accepts  a  check  drawn  npon  it  hy  the  depositor. 

Jn  loaning-  money,  the  hank  may  exchan<^e  cash  for 
the  promise  to  })ay  of  the  horrower,  either  on  demand 
(a  call-loan)  or  at  some  stated  futnre  time  (a  time- 
loan).     This,  however,  is  not  the  nsnal  transaction. 

Ordinarily,  when  the  hank  makes  a  loan  it  is  to  a 
re<fular  customer  who  has  an  account.  In  this  case  the 
horrowin^r  customer  receives,  in  return  for  his  i)romise 
to  pay,  a  credit  on  his  deposit  account  against  which 
he  may  draw  checks.  In  this  transaction  the  hank  ex- 
exchan^rcs  its  own  promise  to  pay  money  on  demand  for 
the  i)romioe  of  the  horrower  to  j)ay  a  lar^rer  sum  at  some 
future  time  or.  if  it  is  a  call-loan,  on  demand;  the  whole 
matter  is  simply  an  exchange  of  credits.  It  is  hecause 
the  horrower  rarely  takes  cash  from  the  hank  hut  prefers 
to  acce])t  a  deposit  credit,  that  the  loan  and  deposit 
items  of  the  hank  statement  correspond  so  closely  in 
amount.  Alost  of  the  deposits  of  a  hank  are  created  in 
this  way;  the  rest  arc  created  hy  the  deposit  of  cash  or 
eash  items. 

Tlie  deposit  item  of  a  hank  is  not,  therefore,  a  record 
of  the  sums  of  money  hrou^iit  into  -the  hank  hy  cus- 
tomers, although  it  includes  such  sums;  it  represents, 
rather,  the  (lemand  liahiiities  of  the  hank  (excepting 
its  circulatiii''-  notes  outstanding)— that  is,  the  sums 
it  may  he  called  upon  to  ])ay  at  any  time. 

Is  it  not  clear,  therefore,  that  what  a  l)ank  loans  is 
not  cash  hut  its  own  credit:'  It  is  a  simple  matter  of 
fact  that  the  honowei'  does  not  take  monev  when  he 


DKP'jSIT  crUHKNC  V 


251 


^"■c'ts  a  loan  but  takes  instead  a  credit  on  tlic  hooks  against 
w  hic'li  lie  can  draw  cheeks,  that  is,  he  accepts  the  promise 
of  the  l)ank  to  pay  on  demand,  whicli  is  a  deposit  credit. 
'I'he  very  fact  that  a  deposit  cre(ht  is  payable  on  demand 
does  not  make  it  any  the  less  a  credit. 

2i)().  lifinJi  credit  pnfcrnhlc  to  cash. — Why  do  jier- 
sons  bori-ow  from  the  bank  unless  they  need  the  money!' 
Why  are  they  willitig  to  pay  interest  on  funds  which 
thev  leave  in  the  bank^  Whv  are  thev  willinij  to  take 
the  credit  of  the  l)ank  instead  of  eash^  Answers  to 
these  (|uesti()ns  involve  a  study  of  the  business  habits 
of  the  business  community. 

A  business  man  borrows  from  a  bank  in  order  to  get 
something  with  which  to  make  payments;  not  usually 
immediate  payments,  but  payments  falling  due  from 
time  to  time  within  a  month  or  more.  The  most  con- 
venient method  of  making  j^ayments  is  by  means  of  a 
check  drawn  against  a  dej)osit  credit  at  the  bank.  The 
chances  are,  however,  that  it  will  be  some  tiuK  .  perhaps 
several  weeks,  before  the  business  man  who  made  the 
loan  at  the  bank  will  have  ^iven  out  checks  for  the  whole 
amount  of  the  loan  and  in  the  meantime  he  may  be 
receiving  funds  which  ai'c  de{)osite(l  in  the  bank. 
Furthermore,  before  the  loan  falls  due.  he  begins  to 
accumulate  a  deposit  so  that  when  the  loan  matiu'es  he 
has  simply  to  draw  a  check  in  favor  of  the  bank  in  order 
to  cancel  the  debt.  The  bank  has  had  the  use  of  the 
funds,  for  which  the  customer  has  been  ])aying  it  in- 
terest, for  some  days  after  the  loan  was  made  and  for 
some  days  before  it  is  repaid. 

*J'.)1.  S}iiftin<^  of  hanK'  credit  icitJiont  liquidation. — 
liut  there  is  still  a  further  advantage  to  the  bank.  l\i 
the  first  ])lace,  the  checks  given  out  by  the  depositor 
are  not  presented  at  once  for  payment  but  may  go  to  a 


MICROCOPY    RESOLUTION    TEST    CHART 

-ANSI  ond  ISO  TEST  CHART  No    2 


1.0    ^ 


'•ii  112.8 


I.I 


m 

■  40 


12.5 


IP  2.2 


2.0 


.8 


1.25 


1.4 


1.6 


^     ^pn\   iFn  ilVMGE     Inc 


05^ 


MONEY   AM)  BANKING 


It 


distant  city  and  pass  throii^di  many  hands  before  they 
find  their  way  to  the  ha?ik.  ^)unno-  all  this  time,  per- 
haps for  a  week  or  two,  the  l)ank  has  the  use  of  the 
funds.  Kven  when  the  check  comes  hack  to  the  bank, 
the  bank  does  not  ordinarily  i'.ave  to  part  with  the  funds 
represented  i)y  the  check,  althou<rh  the  drawer  has 
ordered  the  baid<  to  pay  to  the  presenter  the  amount. 
If  the  check  I'alls  into  the  hands  of  a  customer  of  tlie 
l>.'H!k.  he  will  take  it  to  the  bank  and  increase  liis  de- 
posit account  instead  of  askin^r  for  cash.  As  a  rule 
the  check  will  come  into  the  possession  of  a  person  who 
is  the  customer  of  another  bank  and  he  will  increase 
the  (lej)osits  of  that  bank.  This  bank  will  present  the 
check  to  the  bank,  which  is  liable  for  its  payment,  for 
payment  through  the  clearing-  house. 

^'et  even  now  the  debt(»r  bank  need  not  part  with  the 
cash,  for  on  the  preceding'  day  it  has  received  o?i  deposit 
from  its  own  customers  checks  on  the  bank  holding-  the 
check  against  it.     They  simj)ly  cancel  off  their  mutual 
ol)li^ations,  |)erhaps  i)ayino-  a  small  balance  the  one  to 
the  other.      .Still   the  money  remains  in   the  bank.      In 
fact,  the  oidy  time  the  l)ank  is  called   upon  to  redeem 
its  demand  obli-^ations  is  when  a  check  is  actually  |)r<- 
sented  at  the  tclitrs  w  indow  for  cash  payment  or  when 
the  balances  at  the  clearing''  house  are  runnin;^-  a<4ainst  it. 
The  bank  statement  in  the  followinn-  chapter  shows 
that  demand  liabilities  (deposits)   of  the  banks  are  usu- 
ally  foiu-  limes  as  \:\y<yv  a^  their  cash  on  hand.      Kxpe- 
rienre   has   taught    tlieni    that   a   cash    riserxc    is   amply 
suHicient  to  meet  all  demands  for  I'ash  pa\  nu  iits  which 
an-   likely   t(i  apjuai-.      Tbicc-fourths  of  their  demand 
liabilities    nprestnt    the    bank's   own   credit    which    it    is 


.        ......     i:  I 

.;:;;;    :;;  ;.v  ^  j;  ;;;;; -.;;;;  i;  nri^   ;;;r,iii-.i    I  in    i'i  imi  it  ^^  n  iiIMlIlM  III  \ 

prefers  to  use  checks  lallier  than  cash  as  ;i   medium  of 


DEPOSIT  CURRENCY 


2o;j 


exchange.  This  credit  of  the  hank  serves  all  the  pur- 
poses of  money  and  the  l)ank  can  get  interest  for  the 
use  of  it  just  the  same  as  if  it  were  cash. 

29"2.  SimUaritji  of  checks  aiul  hank  notes. — It  is  pre- 
cisely the  same  as  if  the  hank  loaned  its  credit  in  the 
shape  of  hank  notes.  ]k"fore  the  Civil  A\'ar,  when  there 
was  no  restriction  on  the  issuing  j)ower  of  hanks,  the 
horrower  received  from  the  hank  its  notes,  that  is,  its 
i)romises  to  pay  on  demand;  to-day  the  horrower  receives 
the  promise  of  the  hank  to  pay,  hut  in  the  sha})e  of  a 
deposit  credit  which  really  amounts  to  exactly  the  same 
thing.  Checks,  hased  (tn  these  dej)osit  credits,  circulate 
as  a  Hjcdium  of  exchange,  although  in  a  more  resti-icted 
way  than  the  old  hank  notes.  Xohody  will  deny  that 
a  hank  note  is  simj)ly  the  promissory  note  of  the  hank 
and  that  the  haid-c  loaned  its  credit  when  it  gave  hank 
notes  to  horrowcrs.  ^Vhy  should  ariyhody  deny  that 
a  modern  hank  loans  its  credit  when  it  gives  to  the  hor- 
rower a  deposit  credit:* 

21>a.  Limits  of  cdniiufr  poxcer  of  the  hank. — The  main 
source  of  the  hank's  profit  is  the  interest  received  on 
loans  and  discounts,  and  it  follows  that  the  profit  varies 
directly  with  the  amount  of  loans  made.  What  then 
is  the  limit  to  the  amount  of  loans  a  hank  can  make!' 
The  National  Hank  Act  s  Is  no  direct  limit  e\c(,|)t  that 
it  forbids  any  jiational  hank  to  loiui  to  ;my  individual 
or  firm  an  amotuit  greati'r  than  oiu-tiiith  of  the  hank's 
cajjital  and  surplus.  Indirectly,  it  limits  loans  Itv  pro- 
viding that  national  hanks  shall  k(t|)  a  reserve  whieh 
shall  not  fall  below  a  ecrtjiio  jx'reciitagi'  nf  tin  net  de- 
posits. When  a  bank  gives  a  loan  it  must  lithei-  j)art 
with  that  amount  of  cash,  thus  reducing  its  reserve,  or 
li  must  giv«'  a  (iep<l^lt  endit.  tjiiis  inereasiug  its  net 
deposits;  in  either  easi'  it  has  inereast d  the  ratio  between 


i 
4 


U'yt. 


MONF.V   AM)  HANKING 


ill: 


irsrn-c  and  net  deposits,  and  the  limit  to  wliioh  this 
ratio  may  hv  increased  is  one  to  four,  whieli  is  the  same 
as  savin nr  that  the  reserves  must  be  2.5  per  cent  of  the 
deposits. 

204.  Difference  hehceen   a  cash  and  credit   loan.-  - 
When  the  liank  loans  aetual  cash  instead  of  cre(ht,  it 
increases  the  ratio  between  reserve  and   deposits   four 
times  as  mucli  as  Mheii  crecUt  is  loaned.      For  exam|)le: 
A  bank  with  deposits  of  Ji<l, ()()().(>()()  and  a  reserve  of 
•$.'}()().()()0  (the  ratio  between  them  beinn^  \  ,'.\  ]..'j),  |o;,iis 
>f<I ()(),()()().      I  f  the  borrower  takes  the  cash  from  the  bank, 
tlie  deposits  remain  as  l)ef<>ie  but  the  reserve  has  fallen 
from  -t'JOO.OOO  to  S2()().0()().  thus  chan^in^r  the  ratio  of 
reserve  to  deposits  to  1  :.5.  which  means  that  the  reserve 
is  (udy  20  per  cent  of  the  deposits,  and  this  is  below 
the  le^al  minimum  if  the  bank  is  a  New  ^'ork  national 
bank.     Suppose,  on  the  other  hand,  that  the  l)orrower 
accepts   a   deposit   credit    instead   of   deinandin^r  cash. 
The   deposits   then    increase   to   .$1.1()(),()()(),    while   the 
reserve  remains  as  before  at  $.'{()(>.()0(),  the  ratio  in  this 
case  risino-  to  1:.'}  2-.'J.      When  thr  borrower  took  cash, 
the  ratio  changed  from   1  ::i   I-.'}  [,,  i:.5;  „|u.,,  the  i)or- 
rower  took  credit,  the  ratio  clian^rcl   Irom    \  ;.\    \-'.\  to 
1:.'J   2-;j.      In    the    first   case,    the    reserve    was   depleted 
below  the  leual  limit;  m  the  second  case,  the  l.ank  could 
still  loan  another  ><1(M).()(M)  before  it   reached  the  limit. 
There  can  be  no  (|uestion  as  to  whether  the  bank  would 
prefer  to  loan  i's  cash  oi-  its  credit. 

2i).).  Cdsli  (I  preciotin  eoniniodif//  af  liun.^  It  be- 
comes easier  now  to  sec  the  reason  why  ,-;,s!)  j^  such  a 
precious  commodity  in  Wall  Stred;  not  because  cash  is 
a  medium  of  exchange,  for  Wall  .Street  uses  very  little 
'•'■'  •'  •••  ;:;iiis;iv  iifiw^  iT>  biiMiHss,  iMit  because  cash  is 
the  basis  of  ciidit   uliich  /'.v  the  medium  of  e.\eh;ui^e. 


DEPOSIT  CTRREXCY 


Ilfiice  the  rivalry  among  the  hanks  to  secure  cash  de- 
posits, for  cash  deposits  mean  hirger  reserves,  hirger 
reserves  mean  new  cretht  created  to  three  times  tliat 
■iinount,  new  credit  means  hirger  loans  and  conse(juently 
increased  dividends.  Hence,  also,  the  great  disturhance 
caused  hy  the  withdrawal  o''  a  few  millions  of  cash 
deposits,  such  as  wiien  withdrawn  hy  the  country  banks 
to  "move  the  croj)s."  Withdrawals  of  cash  mean  de- 
pleted reserves,  which  condition  creates  a  shrinkage  of 
bank  credit  and  a  re(hiction  of  ])rotit-making  loans. 

More  than  tiiat,  the  contraction  of  credit — the  me- 
ihum  of  exchange  in  90  per  cent  of  the  important 
transactions  of  the  market — has  the  san  e  effect  as  the 
retirement  of  a  large  portion  of  the  cii'culating  medium. 
The  effect  of  tiie  movement  of  a  t\-w  million  dollars 
westward  to  move  the  crops  would  he  an  unimportant 
matter  if  it  involved  the  contraction  to  that  amount 
simply  of  the  medium  of  exchange;  under  present  con- 
ditions it  involves  a  contraction  of  three  times  or  more 
of  the  amount. 

Those  great  accumulators  of  cash,  the  country  hanks, 
the  savings  hanks,  trust  companies,  in\istment  coni- 
panios,  and  insurance  comp-nies,  ha\{  in  their  pox^cr 
the  control  of  the  money  market,  for  the  cash,  at  Mieir 
disposal  forms  the  basis  of  a  vast  stiucture  ot'  credit 
oil  which  the  business  of  the  tinancial  center  of  the 
country  rests.  The  dangerous  element  in  the  situation 
arises  from  the  instability  of  this  foundation,  for  the 
withdrawal  of  cash  from  the  i-eser'.es  of  the  banks  causes 
the  eo!laj)se  of  the  superstructuii .  credit. 

In  view  o|'  these  facts  the  rate  of  interest  which  the 
>.'ew  York  banks  pay  tor  cash  deposits.  I  '  ^,  per  cent 
or  •_'  per  cent,  is  a  small  matl(  r.  l"or  i  v(  rv  ddllar  of 
casli  dej)osited  they  are  enablcl  to  loan  eiidil   to  Ihice 


J2>G 


MONEY  AM)  BANKING 


times  tlic  amount  at  liom  2  [kv  cent  to  6  per  cent,  thus 
rnakino-  a  ^ross  j)roHl  of  from  .)  per  cent  to  15  per  cent 
on  the  deposit. 

The  word  "deposit"  is  amhiguous  and  has  a  dual 
nature.  When  u  batiker  asserts  that  he  makes  5  per 
cent  ^rross  profit  on  his  deposits,  he  uses  the  term  as 
meanin<4-  demand  hahihties  outstatuhng  (excepting,  of 
course,  circuUitin^r  notes) .  A  deposit  of  cash  in  a  bank, 
however,  rncans  somethin^r  more  than  an  increase  of  that 
amount  of  the  demand  hahihties  of  tlie  bank;  it  means 
an  increase  of  reserve  to  tiiat  amount,  on  the  basis  of 
which  the  bank  is  justified  in  increasing  its  demand  ha- 
bilities  by  three  times  the  amount  dcposite(h  and  this  it 
usually  does  if  there  is  a  market  for  the  loans.  On 
the  receipt  of  a  deposit  of  ^\{H)0  cash,  the  bank  does 
not  put  .$-J.'50  in  the  reserve  and  loan  -$7.50;  it  puts  .$1000 
in  the  reserve  (for  the  reserve  is  not  a  special  fund,  but 
represents  practically  all  the  cash  on  hand  at  any  par- 
ticuli.r  time)  and  increases  its  loans  and  demand  lia- 
bilities ((iei)()sits)  .$.'}00(),  if  it  is  a  reserve  city  national 
bank,  or  more  if  it  is  not.     (See  Section  4()1.) 

2{)r».  Prohlcm  of  the  reserve  of  greatest  importnnee.— 
The  problem  of  what  constitutes  a  sufJicient  reserve  is 
one  that  en^ra^res  the  mind  of  bankers  at  all  times.  The 
amount  of  credit  which  they  can  keep  afloat  and  upon 
which  their  profits  depend  is  determined  by  the  si/e  of 
the  reserve  which  they  can  hold  In  tiieir  vaults.  It  is 
obvious  that  if  a  large  proportion  of  the  demand  credits 
are  presented  at  atiy  one  time  that  the  liank  cannot  meet 
them.  This  hapj)ens  oidy  when  some  event  occurs  that 
shakes  flic  conlidence  which  the  dej)ositors  have  in  the 
bank.  If  tlu-  bank  cannot  dispose  of  its  assets  by  bor- 
rowino-  iiom  the  other  banks,  it  must  fail.  In  addition 
to  this  danger  there  are  certain  times  of  year,  varying 


DKTOSIJ    (I  l{Hi;.N(  V 


2.v; 


in  (iiffcrcnt  localities,  when  hanks  ineiease  their  reserves. 
It  may  he  that  more  aetnai  money  is  used  in  liand  to 
iiaiul  transfers,  oi-  that  the  l)anks  expect  a  demand  for 
local  loans  that  eanses  them  to  increase  their  reserves. 
W'heii  there  is  any  general  movement  on  the  j)art  of  the 
comitry  hanks  toward  inereasino-  their  reserves,  sneh  as 
lakes  ))laee  every  year  when  the  crops  stai-t  to  move,  the 
withdrawal  of  aetnai  money  fiom  the  leserve  cities 
eanses  hank  reserves  there  to  fail  in  voinme.  C'on- 
\ersely,  when  the  demand  for  mon'y  in  the  interior 
>nhsides,  the  money  Hows  hack  into  the  reserve  eitv 
lianks.  and  their  reser\cs  are  tlins  increased.  Hence 
a  reserve  which  is  sntlicient  at  one  time  of  year  may  not 
l)e  at  another:  and  reser\es  which  aie  sntlicient  durino 
a  i)erio(l  when  the  orantino-  of  cre<lit  is  on  a  normal 
l>asis  may  he  lamentahly  insnthcient  when  there  is  a 
•ii'neral  demand   foi-  iiijiiidation. 

2!)7.  LdcJ,'  of  CDOjuralion  cdiiscs  h(ut],s  to  lose  ir- 
serves-  [  'nfortimatcly.  nnder  onr  present  system,  there 
!s  \(ry  little  cooperation  hetween  tin-  hanks  of  dilfcrcnt 
cities  wlieii  demand  for  licinidation  hecoines  o-eneral. 
Kaeh  hank  docs  c\ ciythiny  in  its  power  at  sneh  times 
li)  increase  ils  it^erve,  and  it  mnst  all  he  ;it  tlu'  e\|)ensc 
•  if  some  other  hank.  The  ui'ite.  knows  personally  of 
se\  cral  hanks,  each  of  which  in<-reased  its  r(  sei-\c  diuiiio- 

""'  P""i''  <''■  I"<'7  iMitil  it  amount.  (I  to  ;.>  per  cent  of  the 
de|)osits. 

2!>H.  MelJiods  (.f  'nicrcash}^-  rcscnra.-  \[  sneh  times 

there  are  only  two  ways  of  increasin«,>-  the  total  of  the 

conntry's  hank  i\ser\es  miiii  they  heni,,  |,,  |„.  increased 

antomatically  In   the  oia.hial  li(|nidalion  of  credit.      The 

most   coiiiiiion   nuthod   is  to  neoot  iat.     for   ..,,ld  ;.h.v..=  =  ! 

This  is  slow,  however,  and  is  apt   to  he  e\|Kiisive.      The 

second  nielhod  is  i.v    (he  dep,>sit  ol'  (iovernment  funds 
\  II-  li 


M()N':Y   AM)  I'.ANKING 


J* — ,— 


.-A-. -I 


M  itii  tlic  hanks.  This  was  of  ^yreat  assistance  during  the 
])anie  of  11)07,  hut  it  ecnild  he  taken  advanta'^'e  of  hy 
the  holders  of  certain  securities  which  the  (iovernnient 
oirered  to  aceejjt  as  colhiteral  for  the  h)an.  Since  that 
e\|)erience  the  law  has  httii  clian^ed  so  tliat  the  list 
of  acceptahle  securities  has  hvci\  ^ivatly  enhir^'ed:  and 
tl(M-e  is  IK)  douht  hut  that  the  new  arran^-enu'ut  would 
prove  of  \alue  if  the  expei-ienee  should  hi'  rej)eated. 
This  |)resupposes.  however,  an  a\ailahle  surj)lus  of 
money  in  the  Cnited  States  Treasury,  on  the  presence 
of  w  Iiicli  it  is  not  safe  to  rely. 

2!)!).  Svc(ni(l(irii  reserve. — A  ^rreat  many  haid<s.  in  ad- 
(htion  to  their  casji  reserve,  carry  wliat  is  sometimes 
known  as  a  seconihuy  i'eser\e.  The  cash  I'cserve  means 
money  on  hand  or  on  deposit  in  otlier  hanks.  The 
secondary  reserve  consists  of  any  secin-itics  wliich  are 
readily  marketahle.  Itaiiroad  and  such  municii)al  honds 
as  are  listed  on  tjie  \ew  \nvk  Stock  Kxchan^'c  are  the 
most  poi)ular.  hec  luse  they  are  l)ou<4ht  and  sold  daily, 
and  the  hanker  may  always  ascertain  their  mai'kct  \alue 
hy  recourse  to  the  daily  |)a])er.  Thei-e  are  certain  issues 
which  are  very  active  on  the  exchanoe.  hence  they  hest 
ser\  e  the  liankci's'  |)ur])ose.  Because  of  this,  many  l)ank- 
ers  fall  into  the  error  o{'  thiid-ciny  that  any  hond  which 
is  listed  is  readily  mai-kctahlc.  Theie  aic  a  oreat  man\- 
issues,  jiowever,  wliicii  are  listed  hut  for  wjiich  it  mav 
i»e  far  from  easy  to  find  :\  niarki't.  It  may  he  that 
the  issue  is  small  and  not  widely  known;  or  it  may  he 
that  the  honds  are  closely  held  hy  a  few  interests.  In 
either  case  the  issue  is  ni»t  active,  and  the  honds  will  not 
always  sell  readily. 

The  yreat  fallacy  of  the  theorv  of  investment  in 
listed  honds  on  the  assumption  that  thi\'  are  salahje, 
however,  is  more  fundamental.      I"',\(n  whin  a  hanlv  se- 


DEPOSIT  I  rui{i;.\(  V 


2ry9 


Itcts  as  a  sccntidarv  reserve,  hoiuls  which  arc  active,  it 
iloes  not  follow  that  they  can  he  sold  when  there  is  a 
ut'iieral  (leniaiid  for  licjuidation.  The  same  issue  of 
\nun\s  may  !)e  held  hy  a  thousand  hanks  over  the  country 
111  the  same  theory  and  it  is  needless  to  say  that  they 
(iiiiiiot  all  convert  them  at  the  same  time.  If  any  of 
flicm  sell,  it  will  he  at  a  <4-reat  sacrifice  in  price,  and 
\vith  each  sale  the  price  declines  still  further. 

.•}()().  l^uirliahilit//  of  Jxind.s  as  reserves.— li  must  not 
he  supposed  from  this  that  investment  in  listed  honds 
IS  unwise.  In  practice  they  have  many  times  proved 
to  l)e  a  very  valuahle  asset,  hut  <renerally  for  a  somewhat 
(litferent  reason.  First,  they  are  readily  marketahle 
I  .\ee|)t  during  i)anics,  so  that  if  a  hank  wishes  to  realize 
<»n  its  honds  for  reasons  peculiar  to  itself  it  may  do  so 
without  great  loss.  Furthermore,  in  the  panic  of  li)()7 
tile  city  hanks  refused  to  redeem  any  credits  in  cash, 
M)  that  even  if  honds  had  hcen  sold  on  the  exchange, 
ihe  sale  would  not  have  ohtair.ed  for  them  any  currency. 
I'his  action,  however,  enahled  them  to  make  more  loans 
than  they  otherwise  could  have  made,  and  the  honds  of 
their  coimtry  corrcsi)f)ndents  were  very  aeccjjtahlc  col- 
lateral. When  the  countiy  hanks  saw  the  market  price 
'>f  honds  falling  oft\  they  preferred  horrowing  with 
111*  ir  honds  as  collateral  to  selling.  es|)ecially  as  neither 
■  ilternative  netted  them  any  actual  cin-rency. 

.■}()1.  G(n-crninciif  Deposits. — Since  11K)7.  Secretaries 
"f  the  Treasury  hnw  accepted  honds  other  than  govern- 
ment as  seein-ity  for  government  funds  deposited  in  the 
iiatif)nal  hanks.  The  adoption  of  this  poliev.  which  has 
liecii  recognized  hy  Congress  as  legal,  renders  various 
'  lass's  ol'  honds  .-i  \  Mlo.Mhlc  a***-^'!^  i"  t^inw.  />f'  n..i.;,. 


.1 


■   I 


;  I 


CIIAPIKK   XVII 


HANK.   S'I'A  TK.Ml.N  r      Hl.SOl  H(  I,S 


ifi 


1  '  f 


'M)2.  ('otnhiuc'd  sidtcnn  lit.  In  passing-  iVoiii  the  tlir- 
oretic'cil  to  Aw  ])i'a('ti('al  (lisciission  ol'  hanking',  it  is  will 
i'or  the  student  to  heeonie  t'aiuihar  with  tlie  hank  state- 
ment. It  is  a  siininiin^'  np  of  all  the  transaetions  oi'  the 
hank — a  eondensed  reeoi'd  ol'  all  the  hooks  of  account  - 
and  every  transaction,  no  matter  how  small.  ])i-o(luees  a 
change  in  the  statement.  An  understanding-,  therefore, 
of  all  the  items  of  the  l)ank  statement  will  provide  a 
^•()()d  introduction  to  the  actual  pi-aetice  of  tlie  husiness. 

The  statement  reproduced  in  section  tiOli  on  pai^e  'Jdl 
is  the  eomhined  statement  of  all  the  national  hanks  in  the 
country.  The  federal  law  provides  that  each  national 
hank  shall  make  a  repoi't  to  the  com))troller  of  the  cur- 
rency at  least  five  times  each  year.  The  dates  for  niak- 
iniT  the  reports  are  not  fixed  hut  are  announced  hv  the 
eomptrollei-  at  intervals.  It  is  a  peculiai'ity  of  the  hank- 
in^'  l)usiness  that  it  may  have  a  com|)lete  re])()rt  of  its 
financial  condition  at  the  end  of  each  day.  In  a  mei-can- 
tile  or  manufacturinii'  estahlishment  it  is  ])ossil)le  to  ha\e 
such  a  statement  only  aftei-  an  in\entory  of  the  stock  <mi 
hand  is  taken.  The  assets  oi'  a  hank  are  of  such  a  nature 
that  tlic  perpetual  in\entory  can  he  kept. 

It  was  th()U<,dit  hest  to  take  tlie  i-ejjoi't  oi'  all  the 
national  hanks  rather  than  a  statenu-nt  oi'  any  sinolf 
liank;  the  items  are  exactly  the  same  and  th"  relation 
hetween  the  different  amounts  is  more  ty})ieal  of  the 
avcratje  hank  than  anv  single  statement  could  l)e. 


N)() 


HANK  >r.\  1  i.Mi.N  r    i{ix)ri{(  i:s 


;.'(i1 


;{(>.'{.  Proof  of  lilt'  ticjiti.sif  (■Nrniic//  llicor//.  I'lirtlicr- 
iiioii'.  the  fiuiii'ts  sliowiiiL''  tii(.'  fclatioii  lictwccii  loans, 
deposits  and  i-cscrvcs.  arc  the  best  proof  thai  can  l>c 
(■ffci-cd  as  to  the  vahchty  of  tlic  (k'])osit-can'reiic\-  theory 
presented  in  the  preeechnu' chapter.  It  will  l)e  observed 
that  tlie  total  voliiiiic  of  loans  and  (hscounls  in  the  7  ^■-<) 
naliona!  hanks  in  11»]2  was  hnt  little  in  excess  of  six 
iiillion  of  dollars.  The  in(li\  idual  deposits,  oi-  the 
.iinount  due  to  depositoi's  of  all  sorts  exc-ept  l)anks.  was 
a  little  less  than  six  hillion  dollars.  The  amount  of  rc- 
■''■rxe.  inchidin<4'  the  specie  and  le^al  tender  notes  and  .> 
per  c-ent  rcdcnij)tion  fund,  amounted  to  nine  hundred 
million  dollars,  oi-  1.)  per  cent  of  the  deposit  liahility. 
Since  the  total  amount  of  money  of  all  descriptions  in 
iliis  country  was  then  ahout  S:}.4()0.()0().0()().  and  since 
'he  (le])()sits  in  the  state  hanks  and  tiaist  companies,  com- 
tiined  w  ith  the  figures  iii\  (.'ii.  would  ha\e  made  a  total  of 
M\t'i-  Hfteeii  hillion  dollai's.  it  re(piires  no  argument  to 
>how  that  the  item  '■(lc|)()sits"  does  not  represent  cash 
iKposited  hut  rathei'  credit  extended  hy  the  hank. 
I'herc  is  not  enough  actual  cash  in  the  whole  world  to 
pay  the  de|)osit()rs  of  the  l)anks  of  the  United  States  if 
they  should  suddenly  desire  to  exercise  their  le<>al  right 
and  all  at  once  call  for  payment  of  their  deposits. 


o\ii!iNi:i)  m.i'oKis  i{i:(^iii;i:i)  n\   riii-:  ( oMrriuM.ii-.it  of 
I'nr:  c  riiifi'.Nc  v   i  hom    riir.  \\rioN\i.   hwks 


the 


15  \\K  SI  \ii-.Mi;\  r. 

'iAJi>     HANKS.      SOMMIUH      -'ti.      1 '-*  1  .'. 

liF.SOrHCFS: 
1.   1.11,111'-  .'111(1  (lis(i)unt--  (III  uliich  iirticcr*.  .iiid  (lircctur-;  Mr" 
li.il>lc,  cither   as   |i,iycr"i  or  indiirscr^. 
Feins  and  di  iDiints  (in  wliicli  (itticci's  and  dirccturs  an- 

iiot    lialilc  as   payers  or  iiidorsci-, .'S  l),().)^*.;w.^().'9.KJ 

J.  Ovcniratts,  sfciircd,"  ,$ — ,  imsccun-d.  s— —     ,'(i.K):i,(l()F.H 

;i.   r.  S.  lidiids  to  secure  eireidatioii,  jiar  value T.N.IS.'.SHI.OO 

k   L'.  S.  boiiils  to  >eeurf  L".  S.  liejxisits.  pur  value 4i),ll).j,lO(l.UU 


2fi'~  Mn\]:\   AM)   !{.\\Ki\(; 

■"'•  <'tliir   ImiihK   Id   s(ciiiT    I  .   S.  .Ir|ii,^its <{:(:{()")  1') I   '-, 

<i.    r,   S.   ImiikI.  on    ImihI           ;..,.  "     ;,";:V;.'oii().on 

«.    I  rciiliillils    nil     I.    S,     liniiiN ;,o:>!l.-i.-,|.S| 

S.   HoikIs,  .s.ciiritics.   etc l.(i:i(i!fM  .'!l)(il.:t(i 

H.    IViiiking  lioiisf.   fiiriiitiiic  ^iiul   IIsIuits .'l,<,;!li>,SI)i)..>s 

IC.  Other  real  estate  owned -'!)!()7rtj).")0.  '1 

II.    Due   froiii   iiatinii.il   liaiiks    (mil    rcMr%e  .ip'iiN) 177 JHllvLMi", 

I-.   Due    from  stale   hanks  and    iMiikcrs -'ls].>S!),;!:>S.  V, 

l:i.    Due    Iroin   approved    reserve   aiiciils 7H(i.l!)i».si).i..'l. 

II.  Clueks   and    otiier   cisli   items.'. :il.'lllo!.">fi7!u 

I).    i;xeliaiij.'es   for  elearin^:-  lioii^e J7S,(i7_>,(i|i).;,;{ 

III.  Mills   of  other   national    h.aiiks    KU  |s[j:{Ml() 

17.    (-'raetional   eiirreiuy.   nickels    and    cents :{.;{0(),:{i)0.i)7 

IS.  Specie    (IS.'.:iJo]7JI.71 

li).  I.egal-tender    iio'es    17(i.7  7(S,01(i.O() 

-'0.    live  per  cent     redemption    fund S.>,|S(f,.'7:JX) 

-'1.   Due   from   Treasunr    liiited   States 7,.5H:U(i()!.H 

'f  "'"1   .1)10,9(i,i,788,()17.()8 

MABII/riKS: 

-'-'.  ra|)ital    stock    paid    in s  l,i)t,-,.ll!).V-,s(l.()l) 

-'•*•  Surphis    fund 'loi.'Kifl.s:},!.;,:! 

-'4.    Tnilivided  |)rotits.  less  expense^   am!  taxes -'fls.o<)7,.>,V,.  |  |, 

-'.").    N'ation.d   h.iiik   notes  outsLindinj. I  JI,.)(IJ,I  S.",..j() 

J(j.   State  hank   notes   oiitstaiidiiii: .'7,7(»l.(»() 

.'7.   Due  to  other  national   hanks 1.0.j(l,l!)!»,i):i,>.!n 

J^.   Due  to  state  hanks  and  h.inkers U.MHS.Hd.SI 

■-'!•.   Due  to  trust  companies  and  sa\in;:s  hanks lli,».:ins,!i:i7,S| 

'.iO.   Due   to   approved    reserve   ajreiits l:{.7!l!),:i(lt,(i:{ 

SI.    Dividends    unpaid     1,0:{,>.7,'{S.(;;! 

;i-'.    Individual  deitosits  siihject    to  checks.  | 
M:(.   Demand  certificates  of  deposit.  I 

;U.  'lime  ccrtilicates  of  deposit { J,9H..J()l.U(iiJ,91 

S5.  C'ertifieij   checks.  I 

;?f>.   Cashier's  checks   oiitstaiidiii;.'-.  J 

.'57.    I'nited    .States    deposits S:},.)!)t,l  1:{..'J 

.'is.    I'ostal    savinjrs   (le|)osits l.j,()l:>,:n.").S7 

:i!l.   Deposits  of   I'nited   States  dishiirsin^f  otlicers I -.(if)J.K'< -M 

■UK    HoikK  l.orrovved    .'!S.77  l,(iSS.7H 

41.    .Votes    ,111(1    hills    redisi'omited    10.77(i,J7. '.,)<) 

4.'.    Bills     pa_\  ahle     (iLKr).-.'!!.).,-,,-, 

■i'.i.    I{eserv<'(l     for    taxes 7.U7.!t7.j.Hl 

44.  I.iahilities  oilier  than  those  ahove  stated l,71(>.;i<)7.s:{ 

Total   .>>!10,9(J.i,7HS,iil7.t)^ 


.*J04.  Ddiihlr-ciilr//  .si/slo/i.  -  Tlic  fi''st  tliin^'  to  he 
noted  about  the  >,tati!iKiit  on  tliis  panv  is  lliat  ihv  t^  o 
coluniD.s  of  resources  and  liabilities  exactly  balance  eacli 
otiier  to  the  cent.  The  reason  of  tliis  is  to  be  round  in 
the  system  of  double-entry  bookkeeping-  by  which  everv 
traiLsaction  is  recorded  twice,  so  that  it  is  iiii])ossible  to 


BAN  K  STATK.M ENT— RKsOl  RC 


mi 


alter  the  cirdit  or  resource  s'ul:  without  at  the  same  tiine 
(•lian'4'iii^  the  hahihtx  oi-  dthit  side,  lender  this  system 
the  hank  is  considered  as  havin<^  ro  projjcrty  ol'  its  own, 
liiit  that  all  its  resources  ahove  its  liahuities  belong'-  to 
tlif  stockholders,  and  these  resources  are  classified  as 
part  ol'  the  liahilities  under  the  items  cajjital  stock,  sur- 
plus funds,  dividends,  profits,  aiul  dividends  un})aid. 
Tlicse  items  are  liahilities  of  the  hank  only  in  the  event 
of  li(juidation. 

The  fact  that  the  resources  and  liahilities  of  the  hank 
are  ecjual  has  no  hearin*)-  whatever  on  its  solvency.  'I'lie 
last  statement  ^yiven  out  before  a  bank  fails  inrariably 
shows  the  resouives  to  he  ccjual  to  the  liabilities.  'I'he 
tliserepancy  must  be  looked  for  in  some  of  the  Items: 
either  the  resources  have  been  put  in  at  valuations  above 
their  real  worth,  or  some  item  of  liability  has  been 
omitted  or  reduced.  ]t  is  almost  always  discovered  in 
the  event  of  a  failure  that  loans  and  discounts  contain 
items  which  are  far  less  than  the  figures  set  down. 
(  nder  resources  are  put  down  all  the  items  of  property 
owned  by  the  bank  and  all  sums  due  to  be  paid  to  it 
in  tlie  future.  I 'nder  liabilities  are  placed  all  the  debts 
owing  by  the  bank  and  all  items  representing-  the  e(iuity 
of  the  stockholders  in  the  property  of  the  bank.  In 
other  words,  the  liability  side  of  the  statement  simj)ly 
indicates  to  whom  the  resoui'ces  bel(jn<4'  in  case  the  bus- 
iness of  the  i)ank  were  to  be  settled  up  instantly. 

.30.5.  AlfiTdfidiis  in  xtiliic  of  rc.s-oiirci's.—'Vht'  items  on 
the  resource  side  may  increase  or  diminish  without  any 
tiansactions  ha\ini);  taken  })lace  and  therefore  without 
any  chanues  iiaving  been  made  in  the  liability  side. 
■**^ome  of  the  Jouu-S  mu\'  ni'o^c  to  be  bad  an.d  n.on-col- 
lectible,  or  some  of  the  real  estate  or  bonds  may  increase 
in  market  value;  profits  may  be  made  or  losses  may  be 


h 


2()4 


.MONKV   AM)   1}.\\KI.\(; 


W 


^■'i 


iiicui-rrd.  It  is  iinpossihlc  coiistaiitly  to  adjust  tlic 
valiifs  «4i\fii  ill  the  statciiiciit  to  cori-'spoiid  lo  tiie  real 
conditions.  Ill  sonic  hanks  the  ad.jiistimnt  is  made 
liiriodicaily :  in  otlkrs  only  when  it  is  discovcifd  that 
th'  ahcratioii  of  \ahif  is  jitrmantiit ;  and  in  still  others 
it  is  n(\c  r  made. 

.'}()(!.  ("oiuralcd  asscls.-  It  (V((|iienily  liai)])ens  that 
where  tlie  ii(  itis  of  proj.erty  ha\e  eiihaiieed  in  value  the 
fi«4-ures  on  tlu'  slateuu  nt  ai-e  allowed  to  reniain  ahsurdiv 
low.  creatino-  what  i>  ealled  ■(•oneealed  assets."  It  is 
C'onsidirerl  !)y  a  ureat  many  hankers  an  e\i(i(.nee  of 
conser\atism  to  '•ontinne  to  list  :it  a  low  fi<iui-(  ,  projjerty 
\\orth  mueii  moi(  than  its  hook  value.  TIk fe  ean  he  no 
ohjeetioi,  tr)  ijiis  piaeuee  so  |oni>'  as  e\-eryl)ody  under- 
stands the  iT.d  eondition  and  knows  that  t!ie  statement 
is  a  fictitious  one  TJie  ohjeetidn  '()  the  praetiee  I'omes 
I'rom  the  fact  that  (  wii  the  stockholders  do  not  reali/.e 
H'.e  full  \alue  of  lh<  ir  stock  and  may  ht  induced  to  part 
>vi1li  it  at  a  prict'  which  thiy  would  not  consider  at  all 
if  they  kiirw  Ilice(|uily  repriscnted  h\-  it. 

We  shall  iiosv  tak(  u|)  (at-h  ili m  sepaiati  I.  wiih  such 
t'X])!aMation->  as  r-n  necessary  to  descrihe  the  transac- 
tions hy  w  hi(  !i  it   i^  creaied. 

;i07.  Ijxniy.  mi/l  ilisrninits.  'I'his  item  of  assets  is  in 
the  tiiini  of  pioniiss()i\  nolf  s  nf  iiidi\idua!s  or  corpora- 
tions. 'I'll!'  discount  i(pi(  stilts  iiot(-,  which  ha\f  hecn 
|»urclias»<l  or  d!sc"UMt( d  h\  i\\r  liank  at  a  certain  p-ncc 
ImIow  tli(  Ir  face  \aluc  ai  maturity.  TIk  diircj-cncc  hc- 
'^^'■•■n  !h(  •>, 'due  ;it  maiiiiily  and  tin  price  paid  is  called 
discount,  and  i.-.  at  onct  credited  to  the  prolit  account, 
Mppearinu"  under  "lial)il!tics""  in  llic  item  'undixidcd 
pistils.  ■  Loans.'  I(  clinically  spiakiiiL'.  rtprcMnts  the 
sUlii  jiiini  wiii  i(|ii.'ii  ii  ihc  ia((  u;  ijir  iioie;  ai  maiuiiiv 
the  hank  will  receive  that  amniinl  plus  the  inli  n  st.     The 


HANK  >r.\'i'i:.\ii:.N  r    lii.soruc  i:s 


■:i{;r> 


i\\{Yvrv\K'v  hctwccn  loans  and  discouiits,  thfix't'orc.  is  that 
ill  tile  case  of  loans  the  l)ank  does  not  reahze  its  j)rolit 
until  tlie  note  is  (hie:  in  the  ease  of  (hseoiints  the  bank 
lakes  its  profit  when  the  transaction  is  made. 

Diseoiintin^H"  has  always  been  considered  the  jieeidiar 
iiiisiness  of  a  liank.  In  I'eiinsyhania  the  trust  coin- 
jKinies  are  not  einpouered  to  discount,  but  tliey  ha\  e  the 
riyht  to  loan  money  and  to  purchase  notes  and  other 
iilili^ations.  The  prohibition  of  discount  does  not  i)re- 
\ent  the  trust  com])anies  from  (l()in<4'  a  general  banking' 
liusiness;  instead  of  discounting  they  simply  purchase 
the  notes  outi'ight  or  loan  the  funds  on  the  security 
of  the  notes,  taking  the  interest  at  maturity. 

On  the  back  of  the  bank  report  are  |)rinte(l  certain 
schedules  which  must  be  tilled  out  in  order  to  show  moie 
ill  detail  fbi'  meaning  of  the  \ari()us  items.  The  law 
proxides  tli.it  "all  debts  due  to  an  association,  on  which 
interest  is  jiast  due.  and  unpaid,  for  the  jieriod  of  six 
months,  unless  the  same  ai'e  wi'll  secured,  and  in  proci'ss 
of  eoilcction.  shall  be  considered  Iiad  debts  within  the 
nieaning  of  this  section."' 

All  such  notes  must  be  listed  in  the  schedule,  together 
with  all  notes  which  ari'  ovtrdue  and  all  notes  re|)re- 
senting  liability  of  directors  as  borrowers.  While  there 
IS  no  law  limiting  the  right  of  the  bank  to  loan  to  its 
directors  on  the  same  terms  as  to  any  oilier  |)(rson.  it  is 
rceogni/.ed  that  the  prixilege  is  likely  to  be  aliiisrd  and 
liciiee  the  banks  ait-  asked  to  make  a  s<parate  state  iiieiit 
if  such  loans. 

'M)H.  Ovrrdrafls. —  Where  banking  is  not  conducted 
on  the  strictest  business  j)rineiples  tlii'  depositors  arc 
likclv  to  overdraw    their  accounts.      I'nder  certain   loe.il 


mditions  of  business  overdrafts  arc  iinax  <»i(lal)lc 


ii.it 


the  good  banker  can  usually  arrange  w  itii  the  di  posilor 


add 


MOM.V    AM)  BANKI\(i 


!r¥^ 


'•X 


to  ^/\\v  a  note  to  tlie  hank  I'or  the  amount  and  h.us  con- 
vt-rt  the  ovenh-al't  int..  a  loan  or  (hseonnt.  li'  a  certain 
inaxiinuni  teinporarv  civcht  is  wanted  to  (h-a\v  a^-ainst. 
a  demand  note  should  he  nivcn  to  the  t,ank,  the  amount 
pa.s-sed  to  the  customer's  emht.  and  when  settleiuent  is 
made  the  customer  shonhl  he  charged  with  'die  interest 
on  the  amount  cliecked  out. 

.'J0!».  VnUid  Stales  Ixtiu/.s  to  srcinr  circulation. — This 
item  rei)resents  honds  owned  hy  the  hank  hut  deposited 
in  Wasliinoton.  Prior  to  1013  the  law  reciuircd  the  hank 
to  deposit  or  to  own  Tnited  States  honds  up  to  2.)  per 
cent  of  its  capital  whether  circulation  is  taken  (uit  on 
them  or  not.  The  value  of  the  honds  is  given  at  par 
and  not  at  market  value. 

.'JIO.  United  States  hoiu/.s  to  .secure  I'nited  Stales  de- 
//o.v/V.v.— The  law  provides  that  the  fu.ids  of  the  I'nited 
States  not  re(|uired  hy  the  Treasury  may  he  deposited  in 
national  hanks  if  I'nited  States  honds.  or  under  certain 
c-n-enmstances  other  honds  approved  hy  the  secretary  of 
the  treasury,  ari'  dejxisitrd  in  Wasliinoton  as  collateral. 
The  secretary  may  use  his  discretion  as  to  whether  other 
than   (ioxcrnment   honds  shall    he  accepted  at   all   and 

what  hondsmayheacccptcda.scollateral security.    (Funds 
may  now  lie  deposited  with  federal  reserve  l»anks.) 

.■ni.  I'nited  States  bonds  on  hand.  Sometimes  tli.' 
haidvs  hold  (;o\ernment  honds  in  tluir  (,wn  \aiilts  witli- 
oiil  usino  tluni  io  s.rnre  circulation.  It  is  not  likeK 
that  any  hank  would  hold  (iovcrnment  ix.nds  as  an  in- 
\estmetit.  and  it  is  likely  that  this  item  icpivsrnts  honds 
which  it  is  (Ap.cted  will  I,,,  sold  to  eus!oni(  Is  of  the  hank 
or  will  he  !C(|iiir(il  later  for  .secni'inn' circulation. 

.'{!•_'.   I'reniiunis  on  United  States  honds.      'I'hls  item 

>•,.!  .I-...  ..i.t .      1 1...     .1 :  If 1     I  .1 

""' '''"    '•■'     •:;::;:;;;;;■    ;;;;\\;(n    rin     jno-    \aiuc    and 


HANK  s'l'A  ri:Mi:N  r    rksotkc  i:s 


y()i 


markt'l  \;iiiR'  of  tlif  I'nitcd  States  hoiids  owned  by  the 
li.-iiik. 

.'{l.'J.  lioitds.  securities,  etc. — This  item  embraces  be- 
>mI(s  bonds,  also  stocks.  eIiattel-moi't<>'a<4es,  jud^'- 
iii(  nis.  ehiims,  elc..  owned  by  the  bank.  'I'be  securities 
which  are  deposited  by  l)orrowci's  as  coihitei'a!  seciUMtv 
iMi-  loans  do  not  appiar  in  the  statement  because  thev 
:irr  not  the  |)roi)erty  ol'  the  l)ank  until  del'aidt  has  been 
iii:i(k'  Oil  the  note.  I'nder  the  law  national  banks  are 
iKit  allowed  to  own  coi'Doraticfii  stocks  unless  it  is  neces- 
•>a!y  to  take  them  in  the  collection  of  a  debt.  This  item, 
ilui'cl'oi'c,  I'cprcscnts  practically  the  bonds  owned  bv  the 
liaiiks.  It  has  increasc'd  ^-i-c-atly  within  the  past  Tew 
\iars.  because  many  of  the  banks  ai'e  dealers  in  bonds 
iiid  hold  them  pending'  tlkir  sale  to  customci-s.  and  fur- 
tliermoi-e  because  the  ready  mai'ket  which  is  at  hand  un- 
il'  r  normal  conditions  for  the  bonds  causes  he  bank  to 
i'^iard  tlu'm  as  a  form  of  secondary  rescrxc  which  can 
ahiiost  immediately  be  conxcrtcd  into  money  in  ease  of 
I  iiicr^'cncy. 

.'Hi.  li<i)ihiii<i-  Jioiise  furniture  <(itd  fLvtures.  'I'he 
'omptroller  has  been  rather  strict  in  iutcrpi'ctin^'  the 
law  with  nferi-nce  to  the  holdings  of  real  estate  bv 
hanks.  The  lar^^i'  otlicc  building's  which  lia\e  bein 
I  iccted  to  house  the  banks  as  well  as  to  accommodate 
hundicds  of  tenants  lia\c  b'.'cn  (.rected  by  sej)ai'ate  com- 
jianics.  usually  composrd  of  the  same  stockholders  as 
!lii'  bank. 

.'{1").   Other  real  estate  Iniidiniis.      This  item  includes 

.ot   only   leal  estate  but   ,'!l   mortifa^'es  and   as-.tis  rt  p- 

i'srntin<^'  real  estate.      The  law   is  \ery  strict  in  limitinj^ 

h(    power  of  thf  l>ank  to  hold  I'eal  cstutt,  as  indicated 


;i  the  follow  inu-  pro\  ision  : 


.•>(i.s 


MOM  N      \\l)    i?\\KIN(. 


r 


J' 


A  IMtloiial  l);inki!ii;'  ;i  -Miii.it  Inn  iii,i  v  [ill  I'd  i;i  m-.  hold,  .•(iid  coiix,  \ 
ival  ("-tatr  for  tin    t'(illn\\  iii;^  |iiir|i(i-M  -,  ,iii(i  i'uv  no  dtln  i-  : 

I'liNt.  Such  a>  >hall  hr  iuciN>ai'v  Cor  it-  iiiiiin'(hair  acroiiuiKjii.i- 
ti(Mi  :ii  the  ti'an-actio.'i  of  it-  i)ii>iiu'>s. 

Second.  Such  a-  -.hall  he  inort^^ai^rd  to  It  in  i;()iid  I'allli  h\  u  .\ 
of  si'cuiit  V  f'oi'  (Kill-  [)i\\iou-l\-  coidract((l. 

Third.  Such  a>  -hall  he  coii\.  \ ,  c!  to  it  in  >at  is  fact  ion  (d"  d.  hi  - 
j)l'c\loU>lv  coiltractrd  in  the  course  (d'  iU  di  alili^-. 

I'ourth.  Sucii  a>  it  NJiall  |iurcha-r  at  -air,  under  iudi^iii'ii'-. 
decrees,  or  inortoaM-s  held  h_v  the  association,  or  shall  [lUrchaM- 
to  secure  dehts  due  to  It. 

But  no  such  association  shall  hold  the  possesion  of  aiiv  real 
estate  under  inort^aoi  .  or  the  title  and  possrs^lon  ,if  anv  nal 
estate  pui'chased  to  sicun  anv  debts  due  lo  it,  for  a  longer  period 
t  h.w!  Ii\  e  \ears. 

'I'lir  ohpi't  of  tills  ])r()visi()?)  is  to  ])rev('nt  the  baiik^ 
I'roiii  inx  tstiiio-  tin  ir  resources  in  t'oi-iiis  wliieli  are  iioi 
feadily  eoii\  crtihlf  into  current  I'luids.  In  roi'inci' 
years,  before  tliei'c  was  so  iiiucli  |)ro|)(.i'ly  otliei-  than  real 
estate  which  coiihl  he  iisid  as  security  I'oi'  loans,  the 
h.inks  wert'  ahtiost  forced  to  take  tiiort oam's  oi-  noth.iii" 
at  all.  In  times  (d'  si  riiio(  ncy  wht  ti  (Kpositoi's  were  de- 
inanchno'  easli.  Ilic  h;inks  were  frecpicnlly  eniharrassed 
and  foi'ced  into  insol\enc\  hecausc  thc\  could  not  con- 
\  t  I't  real  t^late.  which  undir  such  eircunistanccs  is 
always  \try  urisalahh  cxccp}  at  a  IrenRiidous  sat'rilic(. 
into  funds  which  would  satisfy  lluii'  dcpositoi's. 

liW).  Dili'  fnni:  iKilidntil  IxiiiL's.  Tllis  re])i(  scnis  de- 
posits in  other  natiiiii.il  hanks  which  niay  iinl  he  counlid 
as  pari  of  the  n  sri\e. 

.'JIT.  liin  frnin  a/i/)r(f.((I  lu  srr:  (  iKhiits.  Prior  lo 
191.'}.   the  country   nall(Uial   hanks  niioht    d(  posit    in   111' 


1 1  ~)i  I  \  t     (iiu-<.    iinii-Mi(iis    oi     I  I.I     iici     rem     (ii     iinii 


BANK   SIAILMLNT-   liKSUUlit  KS 


209 


|(  posits  i-c(niirc(]  as  ix'stTxc.  In  \hc  reserve  cities  iia- 
lidiial  l)aiiks  lui^lit  dejjosit  oiie-iiall'  of  the  2.j  \)ijr  cent 
nijiiired  in  ceiiti-ai  resei'x  e  cities. 

.'{18.  ChccLs  find  other  cash  iUiiis — (WcJi/ai.i^cs  far 
li't  cltariu;^-  house. — I'luler  these  hea(hii<is  are  iiichuled 
i\(rythiML;'  which  may  he  imnie(hately  coinertihle  into 
<Msh.  In  cities  wliere  there  is  a  cleai'inu'  lionse  the 
(lucks  on  the  cka,-in«i'  honse  l)anks  are  listed  separately. 

In  the  slalenieiil  we  see  that  the  exi-lian^es  for  the 
ilcarin*^'  honse  ai'c  o\er  se\en  tinies  as  ^reat  as  the 
iliicks  and  other  cash  items.  Tliis  shows  the  j)rop()r- 
tion  {)['  checks,  etc..  whii-li  can  he  coUected  ine,\pensi\ely 
ind  also  the  j)i'oi)orti()n  whicli  mnst  he  collected  by 
mail. 

.*}19.  li'tlls  of  other  ixitioiuil  Jxnihs.  The  national 
lianks  are  not  allowi'd  to  connt  other  national  hank  notes 
;is  pai't  of  their  riser\c.  It  is  theiefore  to  their  interest 
I'*  have  as  \'c\\  of  them  on  hand  as  possihle.  'i'o  ac- 
tiiniplish  this  they  pay  them  ont  hefoir  anv  other  form 
III'  cni'i'ency.  or  send  them  to  W'ashinoton  to  replenish 
Mie  .")  per  cent  I'l'demption  fund  or  to  make  other  pay- 
iiicnts  to  tlu'  'i'i-e;!snry. 

I 'ndei'  the  diirciiiit  items  i'(  present in;j,  specie  it  will 
'le  noted  that  the  <;()ld  and  sihii-  cei'titicates  are  in- 
ijudcd. 

.'{•JO.  /w'i'v//  tender  notes.  This  re))resents  the  LTrccn- 
liacks  held  Iiy  tlie  hanks  and  also  the  Treasurv  notes  of 
IS',>(»,  which  are  no^^   \(rv  rai'c. 

.'{•_'!.   lit  dim  jitioii  fund.      I'',\ery  national  hank  is  w- 

'|iiir(d    !o    ki  t  p    on    dt  posit    \\ilh    iiie    Treasurv    of    the 

I  'niti'd  Slates  ;i  I  und  i  (jiial  to  .">  per  ei  nt  of  its  outstand- 

MiU'  circnlation.      Prior   to    IIM.'J    ties   dejjosit    could    be 

iinnt((l  as  part   of  the  banks  re(|un(il   reserve  against 


270 


II 


yU)SV.\    AM)   RANKIN(, 


(Icpusits,  and  so  worked  no  hard.sliip.     The  l-'cdcral  I{( 
MT\  f  Act  resdi.ded  this  pcnnission,  hut  tlic  total  vlsvvw 
ix<|Mircd   to   he   licld   aoainst   deposits   was   h.wcml   hy 
much  more  than  the  amount  of  the  .>  per  cent  fund. 

.TJ2.  Due  from  the  Viiital  States  V'/vv/.s/zr//.— This 
Item  inchides  any  amounts  (hie  i'roni  tlie  Treasi'iry  other 
than  the  .->  per  cent  funch  such  as  sums  of  leoal'tender 
money  <leposited  with  the  Treasury  for  the  retirement 
oi  hank  notes  or  honds  forwarded  to  it  for  redemption. 


CIIAI'TKR    XVIII 

n.\SK    S'JAIKMKNT      LfAlUMTIKS 

.'{•J.'J.  Cupiidl  sfoch  jxiid  in.-  The  capital  stock  of  a 
I '.ink  rc])rcscnts  the  fimds  paid  in  by  the  stockholders. 
I  lie  National  Hank  i\ct  i)rovides  that  no  i)ank  shall 
lie^rin  to  do  husiness  nntil  .)()  ])er  cent  of  the  capital  has 
iieeii  jniid  m  cash,  and  the  balance  must  be  paid  iu 
liistallnients  of  at  least  10  per  cent  jier  month. 

The  capital  is  the  mar<rin  paid  uj)  by  the  stockholders 
\n  protect  the  creditors  in  case  of  any  shrinkage  in  the 
resources.  The  law  rc(|uires  ?io  stated  percentage  of 
capital  proportionate  to  the  size  of  the  bank,  but  aims 
In  pi'event  un(ler-caj)itali/ation  as  follows: 


Sec.  .")l;5S  MS  ;iiiu!ul((l  l)v  ;i((  of  Marcli  1  1-.  1 !)()()).  Xo  ;is- 
-o.  iitioii  ^liall  he  ()C^r;mi/(  (I  witli  a  lr>s  ia|iltal  than  SIOO.OOO. 
ixri'pt  iliat  hank-  with  a  capital  of  not  li>s  than  S5().()()()  niav. 
"ith  thf  sanctioii  of  the  Si'iTitary  of  tlio  Trcasurv  be  orcrjinizcd 
inv  place  the  population  of  whicli  dors  not  cNcccd  six  tliou- 
nihaliitanl-.  and  except  that  hank-  with  a  capital  ot'  not 
'' >-  than  $','.■).()('()  ntav.  uith  the  sanction  ot'  the  Secretai-v  of  the 
Treasiirv.  he  or-^ani/ed  In  anv  place  the  popidation  of  uhich 
does  not  exceed  three  thousand  inhabitants.  No  association  >hall 
he  nrfraiii/t  d  in  a  citv  the  population  of  whicli  rxcrrds  (iftv 
Ihousfiiid  ])eisons  «ith  a  c,ij)it,il  (d'  lev-  than  S'.'OO, ()()().' 


M   a  I 
ind   n 


By  this  rcipiiriinent  of  a  certain  niaMmnm  capital 
tor  banks  in  towns  of  moi-e  than  a  i'(-rtain  population 
the  act  prohibits  tlie  establishment  of  banks  with  insuf- 

'  \,iliiiii;il    U.iiik     \(l,    p.    T. 


Hi 


MONKV    AM)   MANKINCi 


ficicnt  capital  in  cities  where  the  loans  and  deposits  are 
hkcly  to  he  hiri^c.  ('ntil  l*)i)0  the  niiniiiiuin  capital  for 
a  national  hank  was  S.io.ooo;  since  that  time  it  has  l)cen 
J^2.). ()()()  to  encourage  the  estahlislinicnt  of  nat 
hanks  in  small  towns. 


lonal 


Soc.  r)!;}}).    Tlie  cajjital  stock  of  cacli  ;L-snriatIoii   <iliall   1 


)r  (11 


\m1('(I   into   ^liar(-  of  SICO 
crtv.   and   t  ran-f(ral)lr 


each,  and   he   dccnii'd   personal    proj 


till'   hooks   of  tl 


ic   association    in    ■>\i(li 


niatmrr  as  niav  hi-  prc-cnlxd  ni  the  hv-Iaw-.  or  arti 


('lis  of  asso- 


ciation.      I'.vcrv   [)(  rxin  l)cconiino;  a  sJiareiioicK  r  liv  sucli  traiistVr 
sh;ill.  in  proportion  to  his  shares,  succeed  to  all  the  rin-hts  and  lia 
hiiities  of  the  prior  holder  of  such  shares.' 

:i'2i.  Double  liahilif//  of  slochholdcrs.  — The  sliares  of 
sto(>k  in  a  I)ank  differ  from  stock  in  othei-  corporations 
in  the  douhle  liahility  feature.  The  piinciple  of  limited 
liahility  is  an  almost  unixcrsal  feature  of  corporation 
laws  in  this  country  and  the  stockholders  cannot  I)e  made 
liahle  foi'  further  payments  for  the  stock  if  it  has  heen 
i  ully  paid.  The  idea  of  limited  liahility  is  of  course  to 
make  it  j)ossil)le  for  pei'sons  wjio  are  unwillino'  to  take 
uidimited  i-isk  in  l)ecomin<4'  partners  in  an  entei-prisc  to 
hecoine  stockholders  with  a  maximum  risk  of  1 
wfdy  what  they  have  j)aid  in.  In  the  case  of  hank^ 
howc\(r.  it  has  l)i('ome  a  tixed  custom  not  oidv  in  th 


osm^r 


national  hank  act  hut  also  in  most  of  the  state  statutes 
to  jjlacc  a  doid)le  liahility  on  the  shareholders  for  the 
hettcr  protection  of  depositors;  the  j-eason  hein^r  that 
the  de|)ositoi's  are  creditors  of  an  entirely  difVerent  sort 
from  the  creditors  of  other  corporations. 


Sec.   .51.")1.    The   sh 


iar(  liol(l(  rs  ot    (Mry   national   hankm"-  asso- 
ciation shall  he  held  individual' \    responsililc  e(|uallv  and  ratably. 


mil    not    t'or  one  another,   (or 


1  Nation. il    li.uik   Act. 


intriK 


(teht 


s,  .iriil  enjja 


gc- 


liANiv  M.\ii;\ii,Nr    i,i.\iui.n"n:s 


ilV6 


s  arc 


1  f 


or 


hctn 
ioiial 


)r  (li 


iroi)- 


^iicli 


ii>tVr 


ili 


■s  ot 
;ioiis 
litcd 
itioii 
ladc 
bt'cii 
ic-  to 
take 


e  to 


nks. 


ti 


le 


utcs 

the 

that 


so 


rt 


IS>1>- 


IDIV. 


IgC- 


its  of  ^ucli  a>>()ciat  ion   lo  tlic  r\tcnl   of  t! 


oiiiit  of  tlifir 


■k  tlnrriiu  ;it  the  |i,'n-  '.  iliU'  tlicridt .  in  .uidition  to  tlic  amount 
1   >har(>.  (Xi-rpt    that   >liai-('liol(lri'-  of  anv   hank- 


ii\i>tr(l   111  -ucli   >l 
111^   association    now    (\i>lin<;-   iindrr 


-tat 


V   laws    havinif    not    k'ss 


th 


111  !^r).()()().()()()  of  capital  actuailv  paid  in  and  a  sui-plii>  of  ^0 


))(  !■  cciituin  on  hand.  l)otli   to  In    dctci-niiiii  (i  hv   the  ( 'oinptrol! 


cr 


the    ( 


iirrcncw   s|i,i||   1,,.   hahir  onlv   t( 


amount    invested   in 


I  III  I  r  shares  ;  a 


nd   such   siirphis  of  '10   per  centum   shall   lie   kept 


leihmmished.  aiui  hi'  in  ad(h'ti()n  to  the  surplus  provided   t' 


lor  ill 


'ills  title;  and  if  at  an\   time  theri'  is  a  deficieiicv  in  such  surplus 


if  '>{)   J.er 


centum   siich  association   shall   not 


pay  any  (lUKleiul 


ciencv  Is  made  i;ood  ;  and  in  i-a» 


ti>  its  shareholders  until  the  deti 

i)f  such  deficiency  the  ( "omptrollei-  of  the  Currency  mav  compel 


sociation  t 


ition  to  close  its 


its  hu-iiKss  and  wind  up  its  aff 
tie  provisions  of  chajilcr  four  of  this  title.' 


urs  uiulor 


.'J2.).  SuvjiJus  fiind.     This  itciii  sioiiiHcs  that  a  cci-' 
ain  ])()rti()n  of  the  resoiii'ces  in  adchtiori  to  the  capital 


pa 


id   in   l)eloiius   to   the   stoekhohlers.      'I'lie   siirjjhis   is 

■  reated   eithei'   l)y  cash   paid   in  at   the  or,oani/atioii   of 
ne  hank  in  ad(h'tion  to  tlie  capital  |)ai(l.  for  which  no 

stock  is  issned.  or  it  i-eprescnts  profits  which  ha\e  ac- 
'iiMHihited  and  wiiich  liave  not  hten  paid  out  in  (h\  i- 
di'dds. 

The  idea  of  tlie  surplus  I'und  is  to  provide  an  item 
ill  the  liahik'rics  which  can  he  used  to  I'cprcsent  chan<>es 
111  the  c(piity  of  the  stoekhohlers  in  the  rest fves  without 
altering  the  capital  stock.  If  the  I»ank  should  suil'er 
a  loss  of  resources  in  any  inanner  heyond   the  amount 

■  A'  undivided  pi(dils.  thr  capital  of  the  Iiank  would  lie 
ipaired  if  it  were  not  for  the  surplus. 

A   surplus   is   i'e(]uired   hy   law    under   the   following 
ction : 


ill 


\(itii>iial    WiwU   Act. 
VII      IS 


.T.  1 


MOM  A    AM)   iJANKINd 


lij 


Sec.  .")!!)!).  Tlir  (liiTclor^  of  ,iii\  .o^oci.ition  mav  scini-aii- 
iiuallv  (Irclarc  a  ilisid.'iid  rf  so  miicli  of  the  lu  t  profits  of  tlic  as 
sociatioii  as  tliiy  shall  .juil.nc  i'\|)<'(liciit  :  l)iit  cacli  association 
sliall.  Ixtorc  the  dccla  rat  ion  of  a  dividiiid.  can-v  one  tenth  pail 
of  its  net  jirotits  of  the  prcrcdinir  half  ycai-  to  its  surplus  fund 
untd  the  same  shall  auuniiit  to  ^H)  ]nv  centum  of  its  capital 
stock.' 

.A  liluTJiI  surplus  ciiliancrs  the  credit  of  Ww  hank 
and  for  that  reason  new  hanks  l'rc'(inciitl\-  start  wi'h  a 
surphis  of  .50  or  100  per  cent  of  the  capital  snhscrihed. 
Tliis  proves  an  advantaof  in  se\eral  ways.  The  hanks 
are  re(inired  to  puri-hase  fewer  honds  than  they  would 
if  the  whole  investment  had  heen  put  into  the  capital. 
l\\  states  where  the  shari's  of  the  hank  ai-e  taxed  on 
their  [lar  vahie  it  reduces  the  personal  property  tux  of 
the  liolders  thereof. 

On  the  other  hand  the  smaller  auiount  of  capitaliza- 
tioiv  reduces  the  i)o\\er  (d'  the  hank  to  issue  circulatinu- 
notes  and  until  the  recent  aniendiiient  to  the  law  I'or- 
hiddino-  the  hanks  to  loan  more  than  10  per  cent  of  their 
c.'.pital  and  sur])!us  to  any  one  person,  the'  hanks  were 
jcslricted  to  10  per  cent  e)f  theii-  capital  alone. 

The  faed  that  the  shares  of  stock  represent  the  e'(piit\- 
of  the  holders  not  only  in  the-  ca])ital  hut  also  in  the 
sur])lus  oi\(.s  the  ])ar-  value  of  hank  stock  nnieh  less 
meanino-  than  the  "he)ok  value."  The  l)()e)k  value  (d 
the  haid<  stock  re])resents  the  -$100  par  \alue  plus  the 
])ro]iortionate  share  of  the  surplus. 

The  whole  ])urpose'  of  i"e(|uirino'  a  certain  capital  sum 
to  he  eonlrihuted  hy  tlie'  shareholdei's  can  !)e  defeated 
hy  the'  suhseiiue'nt  w  ithdi'aw  al  ed'  its  fimds  as  loans  to 
.shareholelers.  It  has  fre'(juently  happe'tied  that  hanks 
have  heen  started  \\ilh  e-apital   horrowed  i)\-   the  inee)r- 


XatioiKil    ]\:n;'..     \<\.   ]i.    JH. 


iJANK  s'i'.\ri;.Mi;.\r    MAHii.riii:s  07-, 

porators,  wlnCIi  horrow  inos  liavc  hecii  repaid  just  as 
sium  as  the  hank  was  in  position  to  make  h)ans  to  the 
sliareliolders. 

Ill  the  statement  (pa^^es  201 -2)  tlu-  eapital  stock  of 
;ill  the  national  hanks  amounts  to  a  httle  more  than  one 
I'ilhon  (lolhirs.  or  to  ahout  one-sixth  of  the  deposits. 
This  means  tliat  there  niiyht  he  a  slu'inkaiie  oC  at  least 
!'•'  per  cent  in  the  assets  of  the  l)anks  het'ore  the  de- 
!l||^ito!s  wouhl  l)e  in  (hmacr. 

:i'2(\.  riuJhidcd  ym^//7.v.  Tnh'ke  tlie  majority  of 
iManui'aeturino-  l»usinesses  the  profits  of  a  hank  are  ear- 
111(1  to  the  profit  and  loss  aeeount  as  they  aeerue  eaeh 
'l.iy.  From  the  on.ss  profits  must  i)e  dethjeted  all  the 
' Ajx-nses  of  doin.y-  the  husiness.  At  the  end  of  the  fiscal 
\«ar  the  directors  nuet  and  declare  dividends  from  this 
item,  the  effect  of  which  is  to  transfer  a  part  of  it  to 
the  account  of  divide^  uijjaid  and  the  halance  t(»  the 
sui|)his.  Sometimes  I  dividends  when  pavahle  are 
placed  directly  to  the  accounts  of  the  shareholders  when 
they  hapj)en  to  he  depositors  as  well. 

•'{27.  XatioiKil  hfiiil,'  notes  outsli,  Unci. — This  item 
rrpresents  the  amount  of  notes  for  which  the  hank  is 
^iill  liahle.  All  the  notes  which  the  comptroller  has 
!  M-warded  to  the  hank  are  charoed  a^i-ainst  it  until  he 
lias  received  the  notes  hack  a,««ain  or  has  received  lawful 
money  for  their  redemption.  If  the  Dank  has  any  of 
'iicsi'  notes  o;i  hand  they  will  he  deducted. 

it  will  he  noted  that  the  amount  of  national  hank 
notes  oulstandin,L>-  almost  eipials  the  amount  of  Cnited 
Slates  honds  deposited  in  the  Treasurv  to  secure  circu- 
■  I'lnn.  At  the  particular  time  this  report  was  made 
lie  l)anks  were  puttino;  out  as  much  eireulation  as  nos- 
-ihle  on  their  hond  (le])osits  on  .aeeount  of  the  very  liio'h 
nite  of  interest    at    which   thev   could    loan   the   funds. 


'^',6 


.M()M:^    AM)   I<.\NK1N(; 


1^1;! 


'I'lif  ;mi()iini  of  Ixiiids  to  secure  cifciilatiDn  is  cnnsid- 
crahlv  ox ci-  oiu'-liall'  the  capital  stock  ol'  tlie  coiiihiiied 
l)anks.  sliowiiin'  that  the  hanks  were  disposed  to  hold 
iiiorc  hoiids  than  they  wvvv  I'lMpiirid  to  under  tlu'  law  . 

'.V2H.  Sidtc  haiih'  iK'tc.s  oiitsldiidiiifi.-  'IMiis  small  item, 
which  amounts  to  only  s;{().()00,  is  a  M'stiyc  of  the  ("i\  il 
War  period.  Many  oi'  the  state  hanks  of  that  time  were 
conxcrted  into  national  hanks.  'I'he  cii-culation  which 
they  had  outstandin^u'  at  that  time  could  not  he  called  in 
and  -S'JO.OOO  of  it  has  ne\ci-  heen  presented  lor  redemp- 
tion. 

The  items  due  other  national  hanks,  state  hanks.  \v\i^\ 
companies,  and  ai)pr()ved  ixserve  agents  represent  the 
{lej)osits  made  hy  othei'  hanks. 

.'J2!).  Iudhldu(d  deposits. — This  item  represents  the 
amount  due  to  indix  iiluals  and  corporations.  Tin 
amount  si<rnifies  the  ohlioations  of  the  bank  x\hich  may 
he  demanded  at  any  time  durin"^'  hankino-  hours.  This 
ohli^ration  is  created  cither  hy  the  deposit  of  money  or 
cash  items  wh'ch  appear  in  the  ojjposite  column  under 
these  headings,  or  hy  the  loans  which  the  hank  has 
granted  to  customers,  and  corresponds  to  the  item 
"Loans  and  Discounts"'  on  the  resource  side.  'V\\v  pe- 
culiar nature  of  this  item  x\as  explained  in  the  preeedin;^ 
chapter. 

On  the  hooks  of  the  haid<  the  individual  deposits 
appear  under  several  accounts.  Hy  far  the  largest 
amount  is  recorded  in  the  indi\  'dual  ledo-ers  and  is  suh- 
jeet  to  clici'k.  For  some  of  the  deposits  the  hanks  have 
issued  certificates  of  deposit  either  payahlc  on  demand 
or  at   a  certain  date.     These  (le])OHts  arc  not   sul).iect 

I .  *_    ;4l»;  i^.lj-     o  1  M  1     M  !V    1  !K!  !.*! !  I  \'     !  IM  \''!  !>!i '    (  M  l!  \'     !  1  !  >(  Hi     i  !  If '     !'f  'f  M  !'! ! 
I •  ;    V  : : •-  •-  r.     ;•-::'  ^     •'• -       i  "  * /      "  *  i 

ot"  the  certificate  which   is  ne^otiahle.      These  deposits 
closely  resemble  savings  dej)o^its  except  that  they  re})- 


HANK    >1  A  ri.MlN  1"      l.I  AlUl.l  1  1 1  .r 


KMiii  a  deposit  in;i(ic  at  oiir  tiiiu'  instead  of  in  install- 
iiiciils.  'I'lif  cri'tificate  of  the  hank  is  soiiKliines  ^iNeii 
liy  I  he  hank  instead  of  a  note,  where  fniids  liave  been 
iMii'i'ow't'd. 

;{.'}().  I'liilfd  Slates  (JfjKisits  (iiid  dcjuisits  of  Viiiti'd 
Shitts  (lishiirsin^  offivcrs.  'I'he  (iovei'iinient  deposits 
^' cnred  hy  I)on(Is  are  (Hxided  into  two  ehisses.  Tlie  first 
:>  more  perinaiKiit  in  eharaetei-  and  eonsists  of  fluids 
(iwned  hy  the  (io\i'i-nineiit  in  excess  of  tlie  (hshurse- 
iiients  re(iuiiv(l.  'I'lie  second  eiass  sii^nifies  deposits 
uliieh  ha\('  been  made  hy  otHeei's  of  the  (iovei'iinient 
t(  iiiporaiily  hut  which  \\ill  soon  be  rcMjuired  to  make 
payments  to  (iovernment  cre(Htors, 

.'{.'{].  lioiids  /;o/vorc'<7/.  There  is  no  re(iuirement  in 
!lie  \alionai  J?ank  Act  that  the  bonds  deposited  hy  the 
I'jinks  to  secui'c  circulation  oi"  dej)osits  shall  be  owned 
Dutri^'ht  by  the  bank.  Some  banks  find  it  profitable 
!m  borrow  from  investors  oi-  other  financial  institutions 
'\\v  bonds  recjuired  t'or  tlu'  |)uri)oses  mentioned.  .So 
InwiT  as  the  bori'owin;^'  bank  is  sohent  and  the  interest 
nil  the  bonds  is  paid  I'c^ulai'ly  to  the  real  owners,  the 
l.itter  suirci-  no  disadvanta^^-  whatever  from  having  the 

Miids  out  of  theii'  ])ossession. 
.■{;{'_*.  Xoh'.s-  (Utd  hills  rcdiscouutcd. — This  item,  so  in- 
^i^H'uificant  in  amoimt,  su^'^'ests  the  <4'i'eat  dilt'ei'ence 
lictwcen  Amei-ican  and  l''uropean  bankini^'.  In  this 
ioimti-y  it  is  considei'cd  a  confession  of  financial  weak- 
ness if  a  bank  seeks  to  rediscount  any  of  the  paper 
Ik  Id  by  it.  In  Kuro])e,  on  the  contrary,  a  Jar^e  i)i'o- 
noi'tion  of  the  paper  ])urchased  or  discounted  bv  the 
i';iiik  is  ac(|uired  with  the  exi)ectati()n  of  rediscoutitin^' 
I.  This  is  a  ureat  advantaijc  because  it  nlaees  a!!V 
'i.iiik  in  a  position  of  bein^'  able  to  loan  to  any  amount, 

now  in<4'  that  it  can  always  replace  the  funds  bv  redis- 


^J7^i 


AIUM:^    AM)   HANKINi; 


^'" 


c-oiiiitliiu'  the  notes.  In  thr  Tnitc-d  States,  prior  l<,  1<>I.'{. 
when  any  hank  reaelied  the  hunt  of  its  h)anni^'  jjower. 
it  was  ohh^u'ed  to  i-el'nse  aeeoniniodation  to  its  enstoniers. 
no  matter  iiow  |)ressinL>'  their  need  oi'  how  (hsti'essin^ 
the  eonse(inenees  of  denying  them  the  I'nnds.  The  |)rae 
tiee  of  i'e(hseonnti!i;.i'  ])raetieally  amonnts  to  makin^i 
avaihdih'  Tor  thi'  u  hoh'  eonimnnity  the  erecht  of  thr  h)eal 
bank  in  the  hii-ner  monty  mai-kets.  The  tanh'ness  of 
Ameriean  hankei-s  to  adoj)t  llu  ])i-aetiee  ol'  i-e(hseountinn 
with  all  its  advanta<<{  ^  hoth  In  themselves  and  the  eoni- 
mnnity. |)artienlaiiy  to  the  eomnumity.  is  mneh  more 
inexplieahle  heeansr  the  disadxantaucs  of  {he  sys- 
tem appear  to  he  insi<.;niticant  compared  with  its  ad- 
van' ages. 

li'.iti.  Hills  jjfi//(ihlc.-  This  item,  which  is  ahont  six 
times  as  hirnc  a-  tiic  precedii,-  one.  sinnifjcs  that  flu 
hanks  June  horrowcd  oiitrii^ht  tiie  sum  ii|)resenled  in- 
stead ol"  selhn<4-  some  of  their  resonrees. 

ii'.U.   ('cr!i/!((I    clitch.-  'I'his    is    an    oivlinai'v    check 
drawn   i)y  a  depositor   which   has   he(  n   ei  ilified   I)y   th< 
cashier  or  othei-  ap|)i'opi'iate  oflicei'  and   which  has  not 
yet  heeii  presented   for  payment.      When  tin    hank  eerti 
fies  a  ehec  1-   t^  r  a  mom  it  is  t:ikiii  from  tin-  aeeonnl  of  llu 
dcpositoi-  and  placed  in  the  certilied  cluck  account.      H\ 
this  act    i(   hceonies  a  dii-ecl   ohlioaiion  of  (Ir'  Imnk  tlu 
same  as   a    |)roniissoiy    note.      If   flu     hank    should    fail 
liefnre  it  is  presented  lor  ])ayment  the  holder  woidd  ha\(' 
no  i-ci'onrse  iipo.i  tlic  original  di-awci-  of  the  check.      Tht 
fact   that    the   holder  chose   to  Iia\<'   it    certilied    instead 
(d'  d(  rnaiuiiiiL!.   pavnicnt   .-it    the  h.'iiik  llu-ons  the  risk  of 
lion-paynient    npon    him.      If   ll,(     maker   of   the   check 
himself  had  it  certilied  his  liahility   for  payment  is  the 
same  as  iii  ijie  case  of  an  or(iinary  check. 

Xi.~).   ('(i.sliiti's  chtiL.s  niihlituiVtii:^.     This  item  i-eprc- 


BANK   STA'n.Ml'.M'      LlAllILiTIES 


M  Ills  the  checks  whicli  the  cashier  lias  signed  on  hehalf 
(if  the  hank  against  (le|)()sits  in  other  hanks  or  checks 
ii[)(iii  the  hank  itself.  New  Vork  exchange  is  the  name 
i^iMii  to  cashiei's  cheeks  which  are  payahle  at  New 
^  iirk  hanks  and  which  aii;  sold  hy  hanks  throughout  the 
(duiitry  to  persons  wishing  to  make  remittances. 


f 


:   . 


CHAl'TKH    XIX 

OH(.AM/ATI()\    WD   U(  SIM.SS  OF  Tin-    R.WK 

.•J'}*!.  \<iti(,)i(il  hniiLs.'-^  V'wx'  (liilViriit  kinds  of  insti- 
tutions in  the  Fnittd  Stjitcs  nrv  included  in  the  o'eriei'al 
t(  rin  hank:  \atioiial  hanks,  statr  hanks,  trust  coni- 
panics,  prixatr  lianks.  and  sa\inus  l)anks. 

National  hanks  nw  corporation;  wliioh  are  char- 
tcrrd  hy  the  Federal  ( ioxci'nnient  to  assist  the  rnittd 
States  Treasury  in  |)ro\idino'  f  ■  j)apei-  eurrencx 
of  tile  country.  The  strict  limitations  iniposrd  upmi 
these  hanks  hy  law.  (specially  tin-  law  which  prohihits 
them  from  loaninu'  on  real  estate  seenrit\-.  ai'c  od'set  li\ 
the  pi\  stim  w  inch  their  national  cliartei-  and  supers  isioti 
hy  the  examiners  ^ives  tlniii  in  tlu'  community. 

lili'i-  'Stale  littuls.  State  hanks  are  chai-tei'cd  hy  tlir 
several  states.  The  h  i^al  restiictiotis  thrown  around 
tliem  \aiy  widtly  hut  in  general  the  state  statutes  ai'c 
mo(|(  l(d  att(  r  ilu  National  liank  .\ct.  The  ditrerenct  s 
l)(twe(ii  natiMiial  hanks  and  state  hanks  so  fai'  as  tin' 
lunetions  IIkv  ixildrm  are  coneeined.  are  so  unimpor- 
t;nd  thai  it  is  not  worth  w  liile  to  discuss  them  separatelx  ; 
therefore  what  follows  will  refei'  |)riniaril\-  to  national 
hanks.  Since  iht  (  i\il  W'ai-  state  hanks  ha\e  heen  al- 
lowed to  issue  paper  cui-rcncy  only  upon  |)aymer>t  ot  a 
10  pel-  cent  pel-  aimum  tax.  which  is  so  jiiwh  as  to  he  ahso- 
lutely  oro|iihiti\e  and  in  conseniiencc  the  state  hanks 
issiK    no  paper  cin-iency. 

.'{.'{S,  ri/\<it,  hfiiihs.  -Vr'wiili  hanks  -.[vc  p.irlnerships 
III  wiiieli  each  of  iiK-  |)artners  is  iiaiiic    for  aii  ii«e  (jeiit-> 

S8() 


UllGAMZAriON    AM)   HISIM'.SS  L>.M 

•if  the  firm  to  the  extent  of  his  private  I'ortiine.  The 
Diilv  ])rivate  hanks  oi'  any  eoiisiderahlt-  si/e  are  those 
ikaHn^-  in  foreign  (.■xehan<i'e.  in  honds.  or  in  real  estate. 
An  important  I'nnetion  of  private  hankers  is  the  pro- 
motion of  new  eorjjorations  and  nnderwritiiio-  lor  new 
issnes  of  seenrities.  The  firm  of  J.  V.  Morgan  and 
C  nini)any  is  ty|)ieal  oi'  this  ehiss. 

:i:V.K  riidcncritiii^-. —  When  a  new  issue  of  srenrities 
is  to  he  hrou^hl  out  an  arran^'ement  is  usually  made 
with  professional  tinaneiers  who  understand  how  to 
make  a  market  for  tlirm.  >\s  the  otlieers  of  the  i-or- 
|)(iration  issuin^'  them  aie  usually  not  (lualitied  to  mar- 
ls(  t  a  vcrv  lari>e  issue,  a  speeialist  in  that  line  is  in 
demand,  'i'he  underwriter  agrees  to  sell  the  entire  issue 
at  a  certain  fixed  price:  sometimes  he  uels  a  eoiuniission 
liiit  more  often  he  relies  for  his  proiil  on  sellin<4'  the 
s(cin'ities  aho\e  the  agreed  priei'.  If  an  issue  is  larger 
than  his  own  firm  can  handle  he  may  or,uaiii/e  a  syndi- 
cate, with  himself  as  syndicate  mana<ier.  lie  then 
;n\  lies  other  capitalists  or  lii'ms  to  sul)scril)e  to  the  syndi- 
cate. If  the  market  conditions  are  uood  the  whole  issue 
can  he  disi)oscil  of  without  callin«i'  upon  the  suhscrihers 
to  furnish  any  funds.  It  is  usual  in  the  case  of  the 
suhscrihers  that  they  know  nothing'  almut  the  whole 
transaction  from  thi'  time  of  their  agreement  to  pro\  ide 
a  certain  sum  if  necessa!\\-  until  they  recei\c  a  cluck 
re|)re.senlin.u  their  share  of  the  profile.  if  the  issue 
should  fail  to  find  a  market  it  may  he  necissary  to  call 
upon  the  suhscrihers  to  make  up  tlu  loss,  or  at  least 
to  uive  them  the  privilci^c  of  takiuL',  up  their  share  ol 
the  unsold  securities  at  the  syndicate  prict'.  The  \eiy 
lar<.>'e  pro])ortion  <d'  "undi^'csled  securities"  which  so 
trouhlcd  the  financial  world  in  i;t(i;j  ami  eaiisid  tin  ncii 
mans  pame  of  that  year,  were  securities  which  under- 


Oj^O 


li. 


-MOM.V   AM)   HA.\KlN(i 


i>  .-»'■■ 


writiiin-  syndic-iites  had  failed  to  sell  to  the  public  and 

had   to  carry   tlu'iiist'lvcs   on   uiarnin   at    their  haidvers. 

;34().   Tni.st  companies.      A  tnist  comnaiiv  was  ori«i- 

III  »  •  ^ 

iially  not  a  l)aid<  at  all  hut  a  company  incorj)orated  t(j 
execute  trusts  in  the  le^al  sense.  TIr-  lar^e  powers 
granted  to  these  corporations  were.  sonieh"ines  ■'inad- 
vertently." found  to  include  the  powci's  necessary  to  do 
a  hankiny-  business  without  many  of  the  limitations  of 
state  i)anks.  In  the  last  twenty  years  there  has  been 
an  enormous  n-routh  of  this  type  of  instiUition,  and  it 
has  become  a  \ery  serious  competitor  of  both  ?iatioiial 
and  state  baid<s. 

.'{11.  li(uihiii>j;  dc  pari  Die  lit.-  The  trust  company  has 
two  distinct  departments,  the  bank  dei)artmeiit  and  the 
trust  department,  with  sets  of  oUict-rs.      The  bank- 

ino-  dej)artment  is  con(]i..ie<'  almost  the  same  as  a  com- 
mei'cial  bank,  althou^yh  the  conditions  and  laws  in  the 
diffei-ent  localities  have  forced  it  to  take  on  a  (hft'erent 
ioi'iu  to  suit  the  circumstances.  In  \e\v  ^'ork  C'itv. 
for  e.\ami)le.  the  trust  companies  ha\  e  specialized  lart^elv 
in  the  collateral  loan  business. 

Tntil  recentiv  the  trust  companies  in  .\(\\  \'()i'k  C'it\ 
were  not  re(|uire(l  to  keep  any  rcscrxc.  Instead  of 
l)lacin,ii' money  in  their  own  \aults.  therefoi'e.  thev  either 
(kposiled  in  nalion;il  banks,  receiving;  thereon  a  small 
I'ate  of  interest,  oi-  loaned  if  for  .lock  e\c!iani;c  purposes 
at  call  loan  latis.  These  loans  could  i>e  converted  into 
cash  at  such  slioi  t  notice  under  ordinary  circumstances 
that  the  trust  companies  telt  it  unnecessary  to  keej)  anv 
other  reserve.  When  the  volume  of  this  business 
reached  ( iiornious  proportions  the  national  and  state 
banks  felt  that  they  wen'  jorced  to  have  on  hand  readv 
monev  suiiiiieni  io  provide  for  auy  su(i(jcn  deman.,\ 
not  only   at    then'  own  counters  bu'   at   the  counters  of 


{)!{(. AM/ATIOV   AN!)   HrsINKSh 


»^ff-^i 


i!I  tile  trust  coinpaiiics  as  well.  Tlicy  IVarrd  that  in 
I  line  of  ^viu'i'al  panic  the  small  pt'i-ccntayc  ol  cash  rchi- 
li\i  to  the  (Icniand  (lc])<)sits  of  hoth  hanks  and  trnst 
1  iiiiipaniis  wnnld  ])rcci])itatc  a  disastci-.  .\t  this  time 
lli(  trust  c(impani;s  wvvv  mcmhci's  ol'  the  clcai-in'^'  h(»iisc 
;i!iil  in  orcK'i'  to  t'oi'cc  the  ti'ust  enm])anies  to  Ui'cp  I'e- 
Mi\is  a  I'ide  was  passed  in  May  ol'  UMl  i'e(|nii'in!^'  trnst 
rMiiij)anies  to  keep  a  reser\  i'  of  ].')  per  cent  in  cash  and 
III  |ier  cent  in  deposits  in  meml)ei'  hanks.  .Manv  trust 
loiiipanies  were  at  first  unwilhnu'  to  comply  witli  this 
|iid\  ision  and  withdrew  from  the  eleai'ino-  house.  He- 
liiic  till'  end  of  I'Jll,  ho\\(.\ei'.  the  leadinu'  tiMist  com- 
panies chan<ied  their  policy  and  rejoined  the  clcai'in<4' 
liHiise.  HeceritK  the  state  of  \e\\  \()i'k  has  passed  a 
i.iw  r((|iiii'inL>'  the  trust  companies  to  keej)  a  resei'xc  of 
i  ")  pel'  cent. 

."UU.  I)(  {losits  (if  Inist  com pdv'ics.  Tn  a  ureat  many 
iMcalities  the  trust  (ompany  has  de\elo|)ed  an  en'.irely 
Ml  \\  field  iiithei'to  ne,t>leet(,(l  hy  thi'  hanks.  Hy  advci'- 
tiMMU  and  other  nuans  they  ha\(.'  attracted  larn'e  imm- 
I"  1^  of  personal  accounts  o!  pi-oplc  who  had  n<  \ir 
iNriiit  thoiiuhl  of  ha\  iti<i'  a  hank  account.  Tlu  sc  de- 
[  iMlors  are  j^ivcn  the  |)ri\  ilei4<'  of  draw  mi '4  an  unlimited 
niiiii'M  r  ol  clucks  aj.ia:nst  tluar  accounts  anil  nvv  usuallv 
paid  intei'cst  on  their  dail\  halanees  of  '1  per  c-etit. 
While  these  personal  accoimts  do  uit  axera^c  \ cry 
lai'^'c.  lhe\-  ait  so  numerous  Uial  the  total  is  considcr- 
ahje.  .Most  of  them  arc  fairly  inacti\e.  and  the  nnmher 
if  checks  is  not  excessive.     With  the  improved  methods 

1  li(ioU-,(  (pinu  aiul  tin  use  of  addinu  machines,  etc.. 
the  ti-ust  cctinpanics  have  found  that  it  is  |)rofital)lc  to 
'■.•iter  to  this  class  of  customers. 

r«f  I  .  rill  I  1  1  t  <  ii 

•">  f'i.      /  /  ^.^(      lii  ji'ii'i  III  (   li  f .  i   iiC      TiiiSi        ir  j  ),i  ii  iiiCnt     ()I 

lilt    tiiist  conipaiiN    has  no  hankinu   function  whatever, 


If 

,  =  tt 

X4i 


*.. . » 
! 

I 


Ui 


m 


'2S  |. 


MOM.N'     WD   H.\\KI\(, 


i"'<l  niaiiy  tnisl  (•..nipauics  .In  not  ])irlcn<l  to  maintain 
;i  trust  <l(  partnunt.     TI,,.  iuiportancr  cf  this  hiisiiuss. 
li'-uever.  in  uunkrn  fiiiaiur  uarmiitsa  brirf  (iiscripticn. 
.-Uk   Inclhidiial  tnisls.      \   tn.st   (Icpartnicnt  of  ;„,v 
si/<-   Mil!   !).■  .Iivl<lnl   i„t,,   lu,,   ,,;,,is,  an    in.livi.lnal   aiiil 
•I  ('orporatc  trnst  dcpartnunt .  lacli  in  charu,.  ..f  a  tnisl 
omccr.      'i'lic    fnnctinn   of  tin    individnal    Irnst    drpnit- 
nua.t  Is  to  ad  as  tnist.v  lor  the  property  of  i.uhvi.luaU. 
•IS  .uuanhan  for  minors  and  incompetents,  as  coiiserx  at..r 
"I  (Stales,  as  exeent.»r  of  wills  and  adnnnlst  rator  of  lli,' 
estates    of    intestates.      A    -real    deal    of    this    hnsines. 
'■'""^"^    *"    "'^'    f''"^^    company    hy    appointment  of  the 
'•onrts.      The  <lnties  of  the  trnst  company  re.jnire  it  tn 
"lana-v  larnv  amonnts  of  property  in  the  form  of  real 
estate  and  seenrities.      Hence   it    is   necessarv    for  them 
t"  lia\e  a.  real  estate  and  hon.l  .lepai'tmeni.  "     The  h.)n(i 
•lepartment  of  many  trnst  companies  I, as  -rown  heyond 
ilie    rniniremenls    of    trnsteeship    int..   a    reonhn-    l.on.i 
iinnse  f..r  the  •.eneral  purchase  and  sale  of  vrurities. 

.'M-.-,.   C.rpnmtc    Irnsls.     'VW    crj-orate    d.'partment 
acts   as    trustee   mider   c.irporate    mort<.ao,s    and    trust 
deeds.      Wlitn  a  coiporalion  wishc   I.,  issu.'  honds  mider 
a  smul,    m..rt,:.a,oc  it    is  imj.ossil.le   (or  each  one  ..f  tli- 
sliareli..ld.rs  to  liave  a   separate  mort^aov.     The  trust 
comp;ui_\    Ik, Ms  th.'  mort.tja.M.'  sui./iect   t<»"the  l.rn.s  pn- 
^'•'•;''cd  in  th.    h.,n.l.  an.l  in  case  of  .lefaidt  of  principal 
•'.''  '"'••'•est  on  th.'  l..,n.l  it   pr.Kvc.ls  a-ainst  tii.^  corpora- 
tion   in   th.-   int.  rests  of  ail   the   [...nd   holders.      It    also 
acts  as  fiscal  ay.  lit    for  c..r|).iral  i..ns.   takin.n    eharuc  of 
the  pa\  I,, .tils  ..(■  coupons  wj,,,,  fl^.y  arc  ^ur  an.i  r<  c.  jv  - 
In-  and  linldinL;'  sinkini.'  fun. Is  to  provid.'  for  the  r.  tir.- 
"""'    "'■  ""•  "hlioati.ins   at    maturity.      Wlim   an   i-suc 
•■i"   '"'M-is    Is   suhj.rt    to    n.i.inptM.n'lh.-    triisl    .•..nipanx 
may   tak.-  char-,,  of  lh..  .Irauin-  of  ih,.   nnmhers  .an.l 


OIICAM/AIION    AM)    lUSlM.SS 


285 


till  |);iyiiu'iit  ol'  the  call  bonds.  'V\\v  trust  c'(>inj)aiiy 
iiia\-  act  a^  rcyisti'ar  I'or  coi'porat '  )iis,  aiitliciiticat  iiiy 
llic  issues  ol'  stocks  and  lioiids  in  ordci"  to  prevent  an 
'!\  ci'-issui'.  It  tr((|ueutly  acts  as  ti-aiisfer  ayent  i'oi" 
;  "i])()i-af  ions  it'  it  is  located  in  a  central  city.  In  the 
i->e  of  failures  a  trust  c()ni]);uiy  sonietiiiies  acts  as  I'c- 
ciiver  under  the  direction  of  the  court.  All  these  fiuic- 
linns  arc  of  niod(  rn  ilc  \  tlo])nient  l)ut  so  nci'cssary  have 
tli(  y  ticvoiue  tliat  it  would  iie  almost  inipo.ssible  to  di.s- 
|:i  use  w  itii  Iheni. 

.'iltJ.  Sd'iin^^s  Ixnihs.  -  A  sa\in,us  hank  is  really  not  a 
I'.ink  at  all.  if  the  word  is  restricted  in  its  use  to  institu- 
iiuiis  \\liicli  pro\  ide  a  niediuin  of  exchan^^e.  A  saxin^s 
j.iiik  is  more  closely  n  lated  to  the  iiivcstnient  company. 
Its  pui'posc  is  sim|)ly  to  recci\e  funds  in  small  amounts 
I'M-  investment  in  sccui'itits  or  I'cal  estate.  The  dei)osits 
nt  not  suhjccl  to  I'heck  and  the  hank  may  cxtii  n'ciuirc 
ihlity  days'  notice  before  niakini'-  payment,  t'onsi'- 
'iiKiitly  the  savinn's  bank  is  under  no  necessity  for  keep- 
'iii;  a  rcsei'\e.  ( )n  tlie  other  hand,  the  sa\ii(,i>s  bank 
li.is  no  credit  which  it  can  loati  and  receixe  an  incoim- 
•!|inii.  The  business  ot'  the  savings  bank  is  simi)licity 
itself.  It  simply  L>athei's  together  small  sums  which 
"f  themsehes  are  too  small  for  inxestment  and  pur- 
iliases  witli  them  inl(  rtst-yicldin^'  secui'ities  or  mort- 
Liay'cs.  The}  usually  |)ay  interest  of  'i  ])er  cent  or  more 
!  >  dcposiloi's.  wh.ile  the  income  iVom  the  in\  I'stmcnls  is 
iisnallx'  below  .")  per  c(  nl.  In  some  states,  like  Massa- 
iliiiMtts  and  \ew  N  ork.  w  lit  re  the  laws  restrict  wry 
closely  tlu'  securitiis  in  which  the  saxin^s  ma,  be  in- 
vested, thus  forciuL;  the  savinus  \y.\\\\\  to  buy  onl\-  first 
cias^  sei'Unilcs,  iiie  in;iii;in  in  i  i  i(|tiiiiii_\  ii.ss  iii;iii  i  pti 
cent.  The  e\pi  ns-.s  of  the  business,  however,  are  so 
small  that  ev  (  n  a   I  pi  r  c(  nt  margin  is  prolitablc. 


I 


t! 


2S6 


MCM.V   AM)  B.\\KI\(, 


Hcfikl 


34.7.  The  <>r;u;(in'rjtth,,i  of  a  J)anl,\~'V\w  usual  nutlio,] 
of  or<rnni/iiio'  a  l.aiik  is  first  to  <.(t  a  subscription  ,,f 
the  iiiccssary  capital.  Kcccntly  c()ni])aiiic.s  have  Ihtii 
I'onncd  for  the  purpose  of  opciiin"-  new  l)ank.s  in  coni- 
mtinities  uliere  the  i-ecent  niowtli  of  husiness  has  justi- 
fied their  estahlishiiunt.  'I'iiese  c-oinpanies.  when  tluv 
ha\f  found  a  locah'tx  which  promises  to  dt\elo|)  siidi- 
ciirit  business  lo  he  prolitahic,  provide  the  capital  and 
the  oflicers.  Wdit  n  the  iiank  is  once  started  and  the 
peo[)le  of  the  conmiiuiity  interested  as  de})ositors  and 
patrons,  then  the  or,uani/in<>-  company  sells  the  stock  to 
local  capitalists  and  emi)Ioys  the  cai)ilal  in  estahlishinn- 
new  hanks  clsewhci'c. 

.'U<S.   I'Jvolnlion    of    Ihr    haul,-.      In    cf)mmunities    of 
slower  nrowth.   however,  the  hank   is  usually  an   evolu- 
tion.     I'^irst  the  local  merchant  or  wealthy  farmer  with 
idle  capital   makes   loans  to  his   tiei«4'hi)ors  and    friends. 
As  the  oi-i<.inal  capital   >j:vn\\s  the  nierchant  or   farmei' 
may   find   that   the   loaning'  business   with  all   its  details 
is  becoming-  niorc  ini|)oitant  than  his  renular  occupation. 
People  lia\e  leai'ned  to  tiMist  these  men  in  their  rc<,nilar 
hues  of  busin(ss  and  intrust   to  them   for  safe  kcc|)inn' 
their  sa\  in->s  oi-  \aluablcs.      Tluy  are  also  asked  to  take 
charge  of  istafes  and   are  consulted    with    I'cfercncc   !o 
iiiNestmcnts.  etc.      In  the  course  of  tini"  these  men  find 
it    necessai'y    to  ha\c  sej)nratt'   ollicis   arran.urd    for   the 
convenient  ti'aiisaetion  of  this  financial  !)usiness  and  jxr- 
iiaps  to  ha\c  assistance  in  tluir  bookkee|)ino-.      This  ma\ 
gradually  develop  into  the  pr!\at'>  bank,  or  the  si/e  o! 
th(    businiss  max    make  it   advisable  to  take  other  men 
into  tlu'  business. 

:u«t.   \h.,ll>>.iJ-  r.       \ :,.,.,...,,,,,..,f.  I     I  ,,  !      ,1 

stockholders  are  tlu    ultimate  authority.      Their   powci-. 
ho\\(  \  er.  is  all  ilc  lei4at( d  to  a  numbei'  of  dii-cctoi's.      Onee 


()R(1.\M/.\'II()N    AM)  msiNKSS 


!ST 


i^in   to 


I  year  the  sliarelioldcrs  ol'  tlic  l)aiik  have  tlic  r 
•Imosr  (lii'cctors,  after  wliieli  they  are  entirely  powerless. 
t\eej)t  ill  cases  of  fraiui  on  the  i)art  f)f  the  directors, 
until  time  for  a  new  election  arri\  es. 

.'{,)().  Directors. —  It  is  upon  the  directors  that  the 
A\hn|e  rrspoiisihility  ot'  the  hank  falls.  The  National 
Hank  Act  makes  certain  re(|uiremeiits  of  directors  which 
;ii(  set  forth  in  the  foUowiiitr  st'ctions: 


I 


i 
■1 


^ic.  •")]  t.").  'J'lu.  .iff'aiis  of  lacli  a^xx'iat ion  sliall  1)(>  niaiia^rcl 
In  not  I('->  than  fi\f  ilircchirN.  who  •>liall  l)i'  flcctrd  l)v  the  sliaro- 
linldns  at  a  iiK'rtino-  to  lie  licld  at  any  time  Ix't'orc  tin-  a>s()i'iatioii 
I-  aiithori/c'd  liy  the  Conipl  I'oilcr  ot"  t!ii'  ('unxMU'v  to  coninuiu'e 
tliu  l)iisini->>  ot"  hanking-,  and  afterward  at  ni('itin<;s  to  he  hold 
(in  >Ufh  day  in  .January  of  each  \vnv  a>  is  >})vciHi'd  tlur('t"or  in 
!lif  artick'>  of  association,  'llw  (hri'ctors  sliall  hold  ottico  for 
one  yiar.  and  until  tliiir  sUccT^sors  arc  L-kctcd  and  have  (jualifiod. 

S(  c.  .")!  4().  livery  dircctoi-  must,  (hirin^'  his  whole  term  of  ser\- 
Ki.  I)e  ji  eiti/en  of  iiu'  I'nited  States,  and  at  least  three-fourths 
it'  till'  directors  nnrst  haxc  resided  in  !he  statt'.  territm'v  or 
(li  ti'ict  in  "hich  the  Jissociatiou  is  located  for  at  least  one  vi'ar 
nnniediately  pn  cedinej  their  t'lection.  ami  nuist  he  residents 
therein  duruij;  tlieir  continuance  in  office.  l'.ver\'  director  must 
nun.  in  his  own  ri^ht.  at  least  ten  -.hares  of  the  c.ij)ital  stock  of 
the  a--sociati()n  of  which  lie  is  a  director,  unlo-  the  capital  of 
the  hank  shall  not  exceed  ^!^."),()()().  in  which  ca^e  he  must  o«ii 
in  his  own  right  at  least  five  shares  of  such  capital  stock.  An\' 
director  who  ceases  to  he  tlie  owner  of  the  refjulred  lunnher  of 
shavis  of  ''>e  -.tock,  or  who  heconies  in  any  other  manner  dis- 
i|iiali(ii  (1.  -hall  thereby  vacate  his  place. 

Sec.  .)1  i-7.  l".a<'h  (hreclor.  when  appointid  or  elected.  >hall 
t.ake  an  oatii  that  he  will,  so  far  as  the  (iut\  devohcs  on  him. 
diliirentiy  and  homslly  administer  the  .atralr-  of  such  assnciatimi. 

1  iti(|.  anv  of  the  provisions  ot"  this  title,  and  that  he  is  the  owner 
m  good   t'aith.  and  in  his  own  rijiht,  ot"  the  numher  of  sh.ire-  of 


JSS 


.M()M,\  an;)  hankim. 


i«i 


w 


slock  •■((|iiir((l  h_v  \\\\>  title,  viil)>cril)((i  In  liim.  or  ^tamliiifr  In 
lii^  n;niir  on  tin  hooks  of  this  a»ociatloii.  and  that  tin  -aiiir  i> 
not  li\  {lotlifcatid  or  111  aiiv  wav  plcdj^-cd  a^  >ccurltv  for  aiiv  loan 
or  <l('l)f.  Such  oath.  -nl)>crlhc(i  h_v  the  director  making-  It.  and 
foi-tlficd  l)v  the  oHicer  het'ore  whom  It  l>  taken,  sliall  he  liuniedi 
atclv  tran>inltted  to  the  (  omptroller  of  tlie  Currencv.  and  shall 
be  filed  and  pre^ei-vcd   In   h|^  otiice. 

Sec.  .■)f^;j!).  And  in  ca-e>  of  Mich  violation  e\er_v  <lirector  who 
partic-ipated  in  or  a>^eiited  to  the  sanie  >hall  he  held  iiahle  in 
ln>  pei'-onal  and  Individual  capacitv  for  all  dania^o  which  the 
association,  it^  >harelioiders,  or  any  other  |)er.-on  >iiall  have  mis- 
taiiicd  in  con^((iuence  of  such  violation. 

Sec.  .").'2;5!).  If  the  directors  of  any  national  i)aiiklno-  a->>ocia^ 
tion  >hall  know  ln;;l\-  violate,  or  knowinolv  permit  aiiv  of  the 
officers,  a^cnt-.  or  >ervants  of  the  a-^ociat Ion  to  violate.  an\ 
of  the  pro\i>ion<  of  thl>  title.  ;dl  the  ri<^'ht>.  privileo-es.  and 
franchix  >  of  the  association  >hall  he  tlierehv  fort'eited.  Such 
violation  >hall.  however,  he  di  teriuined  and  adjiid^cd  l)v  a  proper 
circuit,  district,  oi-  territorial  court  of  the  I'nited  States,  in  a 
suit  hroii^iit  for  that  purpose  hv  the  ('oiiij)troller  of  tiie  Cur 
rcncy.  In  his  own  name,  Ijcfore  tlic  association  >hal]  be  declared 
(iis>olve(l. 

Ill  recent  years  the  responsibility  of  the  directors  f)f' 
l)finks  lias  heconie  an  iinpoi'tant  (luestion.  With  the 
increase  in  the  si/.e  and  the  complexity  of  the  hnsiness 
of  a  hank  it  has  heconie  more  ditlienlt  to  o'ct  business 
men  to  ser\e  on  the  directory  who  are  willing  to  con- 
sent to  contribute  enough  of  their  time  to  ^ct  fidh' 
and  thoi'ouohjy  familiar  with  the  business  of  the  bank. 
It  has  never  \)vv\\  customary  to  ])ay  salaries  to  directors 
and  llic  smnii  fee  of  '^')  to  -S-JO  pei'  meetino-  js  not  sutJi- 
cient  ti)  .justify  busy  men  in  Ki\  inn-  up  much  of  theii- 
time. 

.'}.)1.  ('onsidtrdlioiis  /,»7>r<7v////4'  cJ/oicc  of  directors. 
''he  eicdit  (if  tlic  bank  and   its  atti-acti\  eness  to  depos- 


()K(iAMZA  riON    AM)   lU  SINKSS 


l)V( 


S!) 


ituvs  (Iri)eii(l  ill  IK)  siii;ill  incasiirc  upon  the  rc'])ntation 
"I  the  iiR'ii  on  the  hoard  ol"  directors,  and  hence  it  has 
lieeonie  the  custom  to  select  men  for  that  position  whose 
names  are  hkely  to  [)rove  a  husiness  asset,  not  only 
aiiion^r  the  business  men  of  their  particular  line  I)ut  with 
the  n-errcral  public.  Jn  iiiost  cases  these  men  are  not 
familiar  even  with  the  rudiments  of  bankin-^-  au'l  in 
many  eases  rarely  attend  the  meetings  of  the  board. 
I'lider  these  circumstances  it  has  been  comparatively 
.asy  for  dishonest  otlicials  to  use  the  funds  of  the  bank 
in  their  cnvn  private  interests  and  this  bas  often  resulted 
ill  the  ruin  of  the  bank.  In  an  address  before  the  Penn- 
sylvania Bankers'  Association  in  Philadelphia  in  IDOd, 
Mr.  William  }i.  Uidnely,  at  that  time  Comptroller  of 
the  Currency,  made  the  followitm-  radical  statement: 


T~, 


.MTjit  from  vc  ry  nu'c  ami  ixccptioiial  causes,  such  as  suddfii 
|ianir>  or  lUiis  (luc>  to  fal-L'  niniors,  tlicre  is  iiewr  aiiv  rua^oti- 
mI)!c'  excuse  for  the  failure  of  a  l>ank  or  \y\\^\:  company.  It  is 
almost  always  the  result  of  iuexcusahle  folly  auil  itieompc  tciice 
IT  (lishoiiisty  and  fraud,  and  often  ilw.'  to  all  tlu-i  eoiiihined. 
ll'/(<7/  (I  })(ink  (Iocs  fail,  it  is  flic  i'milt  <if  tJic  hoard  of  directors. 
Many  others  may  he  to  blame,  pcrletjjs  more  than  the  directors, 
Ijiit  the  final  r('s})()n>i!)ility  of  i)ank  managenniit  rests  u])on  the 
(iirectoiN  and  they  are  to  blame. 

Jn  many  cases  the  federal  courts  liavc  declared  that 
a  director's  duty  is  not  !liscbar'''ed  b\-  merei\-  electin<>' 
iithcers  of  ^-ood  rej)niation,  ability  and  integrity  to  nian- 
a<.>e  a  bank  and  then  leavin^r  its  business  in  their  hands, 
'i'he  board  of  directors,  the  courts  have  held,  is  bound 
I'l  maintain  a  su|)ervision  of  the  affairs  of  its  associa- 
tion, and  to  have  a  ^>'eneral  knowledge  of  the  character 
iu'  its 


M  I  .-)  1  I  IV    .'P.S     < 


iiiii   liiC  jri.UiiKi'  iil  V\"iiiCi"i  it  iS  voiitiueleu. 


M(l  to  know  at  least  upon  what  security  its  larger  lines 
'i'  c'redit  ai'c  given. 


I, 


190 


.M()M;y    AM)   IJANKINC! 


;j.VJ.  //r/>^'-.s  t'.  Spauldin^. — The  riiited  States  Sii- 
pi-fiiie  Court  decision  most  in  point  is  the  case  of  Hri<4<,''s 
V.  Spauhhng,  whicli  was  a  suit  hroufj'ht  by  the  receiver 
of  the  First  National  liank  of  Hufralo  against  the  de- 
fendants as  directors  for  failure  to  perforin  fai+h^'uily 
and  diiio-ently  the  duties  of  their  ofhees.  It  was  alleged 
that  they  had  failed  to  call  and  hold  nieetinnns.  to  ap[)oint 
any  eoinniittee  of  examination,  to  reijuire  bonds,  or  I) 
make  personal  examination  into  the  conduct  and  man- 
agement of  the  affairs  of  the  bank.  l)ut  that  instead  ijiey 
allowed  the  executive  officers  to  manage  it  without  super- 
vision.    In  rendering  its  decision  the  court  said: 

\\  ithout  ruviiwiiiu-  tliu  various  (iccisions  on  tliu  siihjeot.  we 
liold  that  directors  must  exercise  ordinary  care  and  prudence  in 
the  administration  of  tlie  aH'air>  of  the  hank,  and  that  this  in- 
cludis  Noniethin<i'  more  than  officiating  as  fi(rp-"l)ca(ls.  Thev  are 
entitled  under  the  law  to  connnit  the  baiikiii^  uu-incss,  as  de- 
fined, to  their  duly  authorized  officers,  l)ut  tliis  docs  absolve 
them  from  tlii'  ihity  of  reusonal)le  su|)ervi.-,ioii.  nor  ougii:  tlipv  to 
I)e  ])ermitted  to  l)e  shiehk-d  from  lial)ility  because  of  want  of 
kn()wl((io(.  ,,,  wrongdoing,  if  thab  ignorance  i-  the  r"  ult  of 
frross  inaJtention.' 

The  law  recjuires  more  of  directors  tiian  a  reasonable 
care  in  selecting  the  officers  of  the  bank.  Although 
there  lias  been  great  difficulty  in  charging  the  directors 
M-ith  civil  liability  for  ignorance  in  cases  where  banks 
have  failed,  yet  the  federal  courts  have  laid  down  cer- 
tain princii)les  wuh  which  every  director  should  be 
familiar.  Referring  to  the  case  of  Briggs  v.  Spauld- 
ing,  the  court  in  another  case  said: 

In  my  opinion  it  flocs  not  meet  tlie  requirements  of  this  state- 
liivi'u   ;;r    ;iu    i;iv>    rii.u    ntJ\if'*rs  iii.i\    euuinic   iiit'  iiiuiii'ia't'iJicnt   (m 

1  Brijrgs  v.  Si)aiil(Iinfr.  Ill  V.  .S.  13^. 


OIUiAM/ATlON    AM)   MISIMISS 


Su- 


je9i 


I 


'1^'  '-puMliun.  of  f|„.  hanlv  Im  a  tni>tr,i  n|firia|.  ,,,ul  tlim  ivpoM' 
"i""i  II"''-  vnutuUuvr  i„  1,1,  n-ht  <'nn(l.u'(  «,tl,„„t  ni;.kii,u-  ..x- 
■niii-iati,,.!,  tl„.|ii..|\r>.  nr  ivlvin-  „|HUi  lil>  aiiMNrrs  to  <rnHvnl 
M'i'-finn,  put  t.,  luVi  ultl,  iv^anl  f-  tlu'  .faf,i>  nf  tlu.  afn.lr,  „f 
'''■'  ''■■'"''■■  ''"'"'  i''''-'  i-  !i"l  to  !)>•  t()lrr,-.|.,l  that  tl,,  v  s.rw  as 
I'l.T.lv  -iMr.l  nniaiMcriK  (,f  i|,r  in>l  it ,  if  i,,;,.  fo  chiiancc  its  al- 
l|-.u'tiv..Mr».   ,„•   tliaf    fluir   r,  put;, linn.   .|h,„1,|   1,..   „.,■,!   ■,>   a    linv 

'" ''"^^"""■'■'-  •  ■  •  II  i-  i""MiiM.t,iit  ritli  III,.  purp..M.>  and 
rliVv  offli,.  Ha.ikin-  Art  that  iU  vital  i,,t,.n>t>  .inaJ.I  in-  rcai- 
!iiitl.d  to  one  man.  uithont  ovn-siuht  and  coiitroj.- 

:{.).'{.  I^iioniucc  IK,  r,rr//.sr.  J)irc(t(.rs  iii;iy  not  cx- 
ciisr  tlicmst'lvrs  iVom  liability  on  tlic  plra"  of  i^'no- 
r;i!ic-e.  Allliouu],  it  is  a  physical  iinpossil)iJitv''ror 
'nnctors  to  liavc  iK'r.s..iial  kiiowlcdoc  „f  tlic  condition 
"I'  the  hooks  and  funds  of  a  very  iaroc  bank,  yet  it  is 
pKssihle  and  even  imperative  for  them  to  emplov  puhlie 
■'••'•"iintants  to  make  andits  of  the  affairs  of  tjie  hank 
iixlependent  of  the  federal  or  state  examinations. 

;{.U.  Sii/)j)lc'nu)/tar//    (WaniinafioNs    //(rc.v,sY//7/.~-The 
t;i'l  that  the  National  Hank  Act  re(|uires  a  fre(|uent  ex- 
animatiw,,  ,,/  the  hank  hy  re<.niarly  ap[)ointed  examiners 
1^  not   sntheient.      These   examinations   art'   neeess,  rily 
i'"'^nij)lete  heeanse  of  the   limitations   ])laeed   upon   the 
I  vaniiner.      l/nder  the  older  methods  of  doinu-  the  hank- 
iiii^'  iuislncss  no  loan  M-as  o-ranted  until  the  directors  had 
s|)criHcall>'  authorized  it.     Applications  for  loans  wore 
'•""ided  in  an  offerino'  hook  which  was  placed  before 
llic  hoard  at  ev^ry  meetinn-.  and  no  loans  were  o-ranted 
until  the  formal  consent  was  ^'iven.     This  method  is  too 
^l<m   aiid  cumbersome  in  these  days  and  it  is  doubtful 
"Iiether  any  number  of  directors  would  have  sufficient 
n-ctiii  inroi-mation  to  intelli;^  ■  tly  aulhorize  every  loan. 
However,  it  is  not  too  much  to  demand  of  a  board  of 

-Gibbons  V.  AiidiT.'-'in,  SO  led.  Uqi.  3tj. 


ft 


*t|$l 


0(>t) 


h 


MONKV   AM)  HANKING 


(lirci't())'s  that  tlu'v  be  I'amiliai-  with  every  loan  which 
may  Ix'coine  (hui^erous  to  the  haiik.  I\\|)erience  lias 
shown  that  lar^e  losses  ha\e  o'.eurred  only  where  the 
directors  have  allowed  the  law  to  he  violated  bv  loaniu''' 
iiior(  than  10  pei'  cent  of  the  capital  to  one  ])erson  or 
corpoi'ation.  1 'in'tlK  rnioie,  e\ery  loan  made  to  a  direc- 
tor or  otlicei"  ol'  the  hank  should  he  carel'nlly  considered 
ill  the  hoaid  meetings.  I  f  e\  t-ry  director  wei'e  familiar 
with  these  two  ty))es  of  loans  and  exercised  his  l)est 
,judiiinent  in  passing'  ii])oti  them  there  would  he  feu- 
lossi's  from  thestsou.  -es.  Moreovtr.  it  would  he  impos- 
sihlr  to  deceive  the  directors  reyai'din^'  such  loans  he- 
cauM  an  ir.dependent  auditoi-  instructed  to  report 
s|)ecially  upon  this  point  could  not  fail  to  discover  any 
ii'rei4idarities. 

.■{.").").  Ojiiii/Dii  of  Compl'-'^Ucr  li'ul^chi. — On  this 
point   Mr.  Hidnely  sp'-'iiks  as  follows: 

Ali()\c  ail.  till'  (lirc(l(..s  of  a  l)aiik  --lioiild  ino-t  closely  scru- 
tiiiizr  tlir  liiaii^  to  iitliccrs  and  otfiir  director^,  and  >t'i'  tliat  tin  v 
arc  kcjil   down  lo  not   onlv  lc;^al  \\\\\  safe  amounts. 

l"ar  tlic  uii)>l  I'rctjiunt  cau-i-  of  haidv  trouhlc^.  in  fact,  tin- 
alnio'^t  iiivariahlc  cause  of  janlx  i'adnrcs.  is  tlic  <;rantinj^  of 
credits  fai'  hi  sonil  tlic  lc;;al  and  |iiiidcnt  limits  to  the  officers  in- 
to one  I'onci  rii  tir  j;rou|)  ot  allied  concci'ti'^.  ^i  lu  iail\  owned 
a;  'luiia^ed  Iiv  the  officers  or  dii( ciors  of"  the  hank,  or  in  winch 
tliey  have  diri'ctlv  or  indirectly,  some  li;r^c  })i'Ciiniary  interest. 

Wlien  a  l)ank  is  in  anvtliiii^  approaching  this  (•(iiiditioii,  it  is 
in  grave  dangir,  for  its  entire  safctv  di  pi  luls  on  the  surccss  of 
oiit-idr  t  nil  I'prises,  and  tin  man  who  should  |)rf)tect  the  bunk 
has,  perhajjs,  a  greater  interest  in  protecting  tlic  other  con- 
cern. It  is  j)rohal)Iv  the  most  coninion,  serious  dereliction  of 
duty  on  the  part  of"  directois  to  allow  such  a  condition  as  this  to 
gradud  t'  'U  in  a  i)anls.      It  may  sometimes  lir  done  honestly 

ns  the  !  f  of  hau  judgment  only,  l)ut  in  my  i  \pi  rienco  it  \* 
the  most     r     iiei;    ctiusc  of  dishonesty  niiii  tiiud  amonjj  ban!-. 


I 


ORGANIZATION    AM)   HISINl.SS 


^9!J 


I 


officers.  I  (Id  not  n'lnciiibLr  a  case  wIiltc  a  liank  dtiiicr  iiad  the 
moral  courage  to  let  loans  of  this  kind  lanv  down  his  hank 
«i'hoiit  rooi'tiiig-  to  crliius  of  -onu'  kind  to  conceal  or  ])i)->t pone 
the  catastrophe,  in  hopi  ■-  that  ^dme  t'ortiinde  ciri'uni^tance  nii^^iit 
inter-'eiic  to  save  hini  and  I'oni'eal  hi^  fraud. 

'Ihi-  fimctioti  ol'  the  honi'd  of  diivctors  is  lo  assimu' 
the  responsibility  t'i)r  the  safety  ol'  thr  \nink  and  io  (kdci-- 
miiif  the  o'eiicral  policies  which  shall  lie  pni-sncd.  With 
the  active  conduct  of  the  business  it  has  nothino-  to  do. 
This  function  is  delc'^'atcd  to  tlie  otlicii's,  the  cliirf  of 
whom  is  the  |)resident. 

.'{.)().  TJic  j)rcsi(lii!l.  The  president  is  alwiys  the  |)re- 
sidino-  ofHcer  ol'  the  hoai'd  of  directors,  it  devolve.s 
ii|)(»ii  him  to  see  that  the  directions  of  liie  hoai'd  are 
carried  out.  In  some  cases,  espeeiall\  where  there  is  a 
this  !uinii!\-  hoard  ol    direetoi's.  the  president  exercises  the 

whole  power.  In  other  cases  he  sim|)ly  carries  out  the 
'  ill  of  the  board  in  tlu'  administrati\  e  details  without 
iiav  ino' even  th(>  authority  to  o-rmd  a  loan.  I'sually  the 
powers  and  dutit's  of  the  president  lie  somewhere  be- 
tween these  two  extremes.  The  boai'd  as  a  rule  deter- 
mines the  maximum  limits  to  which  credit  may  be 
cxlcndi'd  to  |!articular  (iiiiis,  and  leaves  tlu  |)r«  sidcid 
wide  discretion  in  orantino- credits  between  these  liimts. 

Ill  lai"o('  banks  tliei'e  are  \  iee-pri'sidcrds  who  share 
.^  dii  the  presideni  the  didy  of  ne^'otiatino-  with 
itonouers. 

;{.')7.  Tlir  cdsliicr.  The  cashier  of  the  baid<  is  its  chi(d' 
.'Xicutixc  otlieei-.  u|)ou  whom  falls  the  duty  of  opei'atin;^ 
the  bauK,  He  has  direct  <'harL>f  td'  all  the  employes 
and  must  of  I'otn-se  be  familiar  with  the  details  of  every 
•Icpartmeid.  He  usually  acts  as  si'ci(  tary  ot'  the  boanl 
■if  (hri'ciors.  it  is  ins  duty  io  prepare  iiie  reports  and 
'I'tmeuts.      Ml    is  llw  ullicer  (  inpowei'cd  to  si^ii  doeu- 


■idi 


MONEY   AM)  HANK  IN  (1 


iiK'i'ts  Oil  heliair  of  tlie  hank.  His  sif^iiature  must 
alnays  a])])eai-  111)011  tlic  eirciilatino  notes  issued  or  the 
checks  and  (h'al'ts  dcawii  hy  the  hank  u])(  its  corre- 
spondents. 

In  most  lianks  which  ha\c  not  yet  developed  a  s|)eeial 
crechl  d'|);n'tnien!  the  cashier  is  the  ehiel'  credit  ofheer. 
\\  hilf  th(  president  or  \ice-presidenl  usually  ivtaiiis  the 
autlmrity  to  yiant  loans,  he  usually  depends  upon  the 
cashiei'  for  inrormatioii  as  to  the  cre(ht  responsihiiity 
n\'  tin  a|)i)lieant.  In  those  hanks  where  the  list  of  hor- 
rowci's  has  heconu'  extended  and  where  the  adxantan'c 
of  a  credit  hiirea.u  is  recooni/ed.  the  cashici-  iVcijuently 
has  an  assistant  who  has  sj)eciali/,e(l  in  this  field  and  who 
understands  how  to  accumulate  and  systeinati/e  informa- 
tion aH'ectin>4'  the  financial  status  of  the  [)atrons  of  the 
hank. 

The  ei(  (lit  departnieiit  of  a  hank  i)ioh;ih!y  oi!'ers  more 
opportunil)  for  an  employe  to  ac(|uaint  himself  with 
the  science  of  hanking  in  general  than  any  other  depart- 
luent.  The  husiuess  of  a  hank  is  of  such  a  routine  char- 
ac-ler  that  the  emj)loyes  ha\e  \ery  little  op|)ortunity  to 
learn  tlie  husiness  from  the  inside,  or  to  tiispla\  initiative. 
or  to  perform  duties  re(|uirinjjf  discretion.  !  nlike  most 
husinesses  tlii're  is  no  line  of  jiositions  which  i-e(iuii( 
successively  more  and  inoi(  husines.s  sagacity  on  the  part 
of  Ihe  ocdijiant.  The  ^ulf  hetween  tin  highest  em- 
ploye and  tilt  ollieer  is  a  wide  one  and  very  dillicult  to 
cross;  in  most  lar^e  city  hanks  it  is  |)raetically  inipossihle 
to  cross,  and  tin-  oHieers  are  usually  reciuittd  from  small 
institutions  where  the  emnlo\  e  has  had  an  oi>noitiunf\ 
to  learn  all  departments  of  the  hank. 

.•J.>H.  P(it/in(/  teller. — i\ii  imj)ortant  (mplo\e  of  IIk 
hank  is  I  he  payin;.*  Uiler.  in  ii.is  charge  of  all  iii(  (lut- 
g'oing    I'lnuls    o|'    the    li.inlv.      The     transaclions    which 


UKGAM/Al'loN    AM)   lUJSiNESS 


295 


a(iuire  the  paying  out  of  cash  are:  (1)  Cashing-  of 
clieeks  presented  at  the  bank;  (2)  payment  of  debit  bal- 
ances to  the  clearing-  house;  (3)  shipment  of  euiicncy 
to  correspondent  banks.  It  is  the  (hity  of  the  jKiyinir 
teller  to  see  that  all  the  cash  of  tlu-  bank  is  ])roperly 
accounted  for.  It  is  necessary  that  he  be  familiar  with 
flic  siuiiatures  of  all  the  (ki)osilors  so  that  he  may  make 
iiu  payments  without  havin<>-  pro])er  vouchers  to  show 
!.ii  them.  Hanks  are  under  legal  rcspdn^ibility  to  de- 
positors to  pay  out  no  funds  on  tluir  account  excei)t 
t  •  the  proper  payees  or  their  order.  Kven  if  the  signa- 
ture on  the  check  is  genuine,  still  the  jjcrson  demanding 
pavment  may  not  have  ])roper  title  to  the  check  or  he 
may  have  altered  it.  It  is.  therefore,  the  duty  of  the 
Idler  to  safeguard  the  bank  by  re(iuiring  proi)er  en- 
dorsement before  tlie  cluck  is  paid,  so  that  m  case  the 
depositor  attemjjts  to  repudiate  'in  ■heck  the  bank  can 
;ill  upon  the  payee  for  ih  mibnrsemeid. 

:$.•)«>.  Jiecciviii;^-  tclltr. — The  employe  second  In  im- 
portance is  the  receiving  teller.  I'nless  there  is  a  note 
cl.ik  in  the  baid<  it  is  tl.  duty  of  the  i(cei\ing  teller 
to  lake  in  and  account  for  all  the  funds  which  come 
into  the  bank.  His  chief  duty  is  to  receive  cash,  checks, 
(hafts,  and  other  items,  and  to  give  credit  to  dei)ositors 
tnr  the  same.  His  principal  duty  is  to  assure  hiniM-lf 
that  everv  item  for  which  credit  is  given  is  collectible. 
Funds  comi'  into  the  bank  from  {  1  )  depositors.  (2) 
credit  balance  s  at  the  clearing  house,  {li}  i)ayments  on 
maturing  j)aper  held  by  the  bank  either  as  an  asset  or 
for  collection,  and  (  t)  currency  shipiped  by  correspond- 
ent banks  or  by  the  Treasury  of  the  rniled  .States. 

;j«)().  Xolc  Itllcr.  Where  the  business  of  a  l>ank  is 
extensive  iitongh  to  re(|uirc  it.  there  is  a  note  teiier 
whose  function  if  is  to  make  all  the  collections.      Matur- 


.'.'i)(i 


-MONKV   AM)  HANKING 


4- 


ino-  notes  payable  at  the  hank  art  'w  his  chai-f^e.  He 
!-ecei\t  s  all  eas  mittaiices  from  lail-ol'-towii  eiist oiners. 
He  lias  (lirec  liaroe  of  all  the  eojlectioiis  of  drafts, 
etc.,  ill  the  city,  except  the  checks  on  clearin<>-  house 
hanks,  wlileh  are  usually  attended  to  hy  the  clearing 
house  eJei'k. 

;3()1.  Di.scn/nil  chrlc. — The  discount  clerk  has  charge 
of  all  the  loans  and  discounts  of  the  hank   after  they 
have  been  negotiated  hy  the  ollieers.      It  is  his  duty  to 
keep  the  documents  so  systematically  that  there  will  he 
proper  presentation  made  of  them  when  they  matiu'e. 
When  due  the  interest  is  cali'ulated  and  the  noti'  turned 
over  lo  the  note  teller   foi-  collection.      He  has  charov 
of  all  till'  collateral  held  to  secure  loans  unless  the  bus- 
iness is  so  large  as  to  r(i|nii'(   a  en||atei\d  loan  cierk.      In 
l»ard<s  ha\  ing  close  I'dations  -villi  stock  brokers  the  latter 
|«'Mtioii  may  l»c  a  \vv\   icsponsihle  one.      The  collaterals 
held  to  seciii-e  loans  to  stock  hrokers  are  constantly  hring 
withdrawn,  substituted  and  replaced.     Furthermore,  in 
times  of  active  speculation,  the  values  of  the  collaterals 
arc  shifting  so  rapidly  that  the  collateral  loan  clerk  lias 
great  resj)onsil)ility  in  seeing  that  the  margin  of  security 
d'  niandcd   hy   the   hank   is   maintained  and   the  call    for 
:iddili(.Mal   collat.ral    is    propcrlx    si  nt    out.   so   that    the 
borrower  can  lia\i'  no  grounds  of  c(.mplaint  if  the  hank 
liuds  it  necessary  to  sdl  the  collateral  to  |)rotect  itself 
in  a  ])anicky  market. 

;{<;■_'.  JiixiLhicpiiiii'  (Ii/xirtmcnt.—'Vhv  Iransactlons  of 
all  the  tellers  and  other  clerks  are  finally  referred  to  the 
bookkee|)ing  depari  ini  nt .  There  is  alwa\s  a  genera! 
ledger  u\'  the  \ku\1  containing  the  accounts  summarized 
Ml  the  hank  siat(ni(iil.  It  is  th<-  duly  of  the  ovnerai 
bookkeeper  to  iiiak(  iii)  a  dailx  >lat(  tneiit  show  in. >  the 
^•""•hiinii  of  III,    hank  and  all  statements  re<|uin  ,1  b_\   the 


OlUiANIZATION    AM)  1USIM:sS 


297 


,  iiiii|)ti'nlk'r  of  the  ciirreiicy.  'V\\v  Imlk  ol'  thr  book- 
Lii  [)iii^-  work  falls  upon  tlic  iiulividiial  ledo-ep  keepers, 
whose  duty  It  is  to  chai'^c  to  the  depositoi's'  aeeouiits 
e\erv  cheek  di'auii  hy  the  hittei'  and  to  credit  their  ac- 
counts with  all  the  deposits  reported  hy  the  receiving 
teller.  The  bookkeeper  must  keep  the  paying  teller 
iiifoniud  as  to  the  lialances  of  depositors. 

In  many  hanks  there  is  a  separate  dej)ai'tme''t  for 
liandling  eorrespondei\ce  and  the  collection  of  out-of- 
Imwii  items.  It  has  hecome  the  custom  of  late  years  for 
II  iiiittances  to  he  made  in  checks  on  local  ])anks  rather 
than  in  \e\v  ^'ol•k  exchange  oi-  tnoncy  orders  as  for- 
Dicrly.  In  some  cities  the  hanks  ai'c  so  anxious  to  secure 
tilt  (kposit  accounts  of  lai'ge  firms  thai  they  make  no 
charge  for  the  collection  of  local  checks,  although  this 
may  re(|uii'e  con'cspondenec  with  a  multitude  (d'  banks 
in  all  ])arts  of  the  I  'nited  States. 

.'$•!.'{.  Lii:cs  rt'ldliii^'  to  collections. — Kvery  (le|)osit  in 
a  hank  other  than  cash  must  be  collected.      If  the  item 

N  ;i  chfcU  on  the  bank  itsell'  oi-  a  matured  note  payable 
:i!  tlie  hank,  it  is  paid  as  soon  as  the  baid<  gi\es  ci'cdit  to 
iiic  depositor.  Hut  if  the  items  ate  payable  hy  another 
paity  the  bank  is  usually  c-onsidered,  in  the  absence  of 
a  special  agreement  and  when  the  items  are  endorsed  in 
lilank  Ol  in  full,  to  be  the  bailei'  of  the  di  j)ositor.  The 
deposit    is   in    fact    a    special    deposit    until    the    proceeds 

i'  the  I'ollection  aic  lodged  in  the  bank  and  credited  to 
the  <iepositor,  whifeiipon  the  relation  between  bank  and 
dc])ositof  changes  to  that  of  debtor  atid  creditor. 

As  bailee,  tiic  bank  has  all  the  righis  to  the  pa|)er 
1:!  ill  and  may  sue  upon  it.  In  ti'c  evtni  if  its  noti-col- 
I'ction  the  bank  ma\-  rescind  the  credit  alread\  liixtii  the 
depositor,  thus  pio\  ing  that  the  bank  had  not  purchased 
the  paper  and  taken  title. 


^98 


MOXF.V  AND  n AXKIXG 


1-"^* 


r" 


Insolvency  of  a  hank  revokes  its  power  to  collect  and 
It  mnst  l.ol.l  nneolleeted  paper  as  a  special  deposit  of  tlu 
ouner.  If  :t  receives  proceeds  of  a  collection  and 
in.no-ies  then,  u  ith  the  general  funds  of  the  bank  it  is 
^nilty  of  fraud. 

A  collecting-  hank  should  accept  nothin-  hut  nionev 
-"  pay.uent  hut  it  has  hee..  held  iunocent  (,f  ne-liLrenc'e 
whe.>  ,t  ha.l  taken  a  certified  or  even  an  uncertif  .d  duck 
winch    ..    presented  to  the  drawee  hank   without  delav 
and  the  takn.o-  ..f  which  cause.l  no  loss  to  the  owner  of 
th,  collcctH.n  iten,  hy  reason  of  release  of  endorsers  etc 
;,  I-"""''-payn.ent  of  the  cheek  taken  in  pavnient  of 
til.'  eollcctiou  iteni  the  hank  should  recover  the  item  if 
P-SH  .c-    the    san.e   day   an<l    protest   it.     J^avnient    hv 
worthless  check  is  no  payment  aud  the  hank  (V.uld  pn,'- 
test  the  Item  even  if  the  payer  refused  to  ^Wv  it  up 

If  a  colleetiou  item  is  endorsed  "For  collection  and 

mn.ttance.     the.  proceeds  becon.e  a  part  of  the  <.eneral 

nnds  ol  ti,e  hauk  as  soon  as  a  draft  is  rcn.itted,  ami  if 

ihc  draft   proves  worthless  the  owtier  of  the  colleetio,, 

cannot  chum  the  funds  as  a  special  trust  deposit 

if  the  hank  has  collected  a  check  heari.,^r  a  forLred 
endorsen.ent.  the  proceeds  heiong  to  the  ri^d.tful  ou.ur 
•"Hi  n.ay  he  collected  hy  him  althouo-h  the  hnuk  ha. 
t.nned  over  the  proceeds  to  the  person  dcpositluLr  th. 
item.  " 

A  \ew  ^•ork  hauk  reeeive.l  a  "tramp"  collection  (one 
"■''""^■'  '•>  ••'  ^^'••■'"^■^■•-  ^^itl'  whom  it  ha<l  no  account), 
col lecte.l  ,f.  .ieducted  its  collection  fee.  an.l  re.nitted 
'^'';''''  '"'-"^'^  <'>'l  that  the  cheek  had  heen  lost  in  the 
'"•"'  alt<r  Ik,,,,..  ,.udo,-sed  in  lull;  the  thief  forord  the 
c,.do,-Mme>,t  ami  sold  it  loan  iunoe.nt  pa.'ty  who  sent 
'-  ■''-  *  ■-    -  ---  \  ink  i-..i,k  for  eoiieetinn-.       i),^  {j.,,^.  ,,.^.„^,,. 


U  4..  »!...  \- 


^^ 


ORGANIZATION'   AND   BUSINESS 


0( 


)9 


recovered  from  the  hank,  w  hicli  was  uiiahle  to  locate  the 
])( i.soii  to  wlioin  it  had  paid  the  j)rocee(ls. 

Hut  a  (h-a\vec  hank  caiiiiot  collect  the  proceeds  of  a 
raised  check  i'roiii  a  collecting  hank  if  they  have  heen 
paid  over  hy  it  to  the  owiRr  of  the  item. 

.'}(U.  Liahilit//  of  col  lectin^-  hanJx. — When  a  hank  .in- 
(Idiakes  to  collect,  it  makes  itself  liahle  Tor  all  losses 
caused  by  its  neglitifenee,  hut  it  is  not  res])onsihle  for 
\]\v  iie<'l!''ence  of  a  notary  selected  hv  it  with  ordinary 
care  because  the  notary  is  a  public  (Mlicer. 

The  law  varies  in  the  different  states  as  to  the  liability 
of  a  collecting  bank  for  banks  to  whom  it  sends  the  item 
in  course  of  collection.  In  the  federal  courts,  and  in 
l'(  imsylvania.  \ew  York,  Xew  Jersey,  Ohio,  Indiana, 
Michigan,  Montana,  and  Minnesota,  it  is  held  that  a 
collecting  ]):uik  is  Jxiilcc  and  liable  for  the  agents  it  se- 
lects to  make  the  collection.  In  the  otiier  states,  the 
l)aiik  is  held  to  be  the  (i^cnt  and  renders  itself  liable  i'or 
sub-agents  aj)|)ointed  by  it  only  to  the  extent  of  using 
(Ilk-  care  in  selecting  them;  be\  ond  this  the  sub-agents 
;i!(  responsible  to  the  owner  and  may  be  sued  by  him. 
It  is  held  to  be  negligence  for  a  collei'ting  bank  to  remit 
tlif  item  directly  to  the  drawee  bank,  since  that  bank 
may  in  ^'e  an  adverse  interest. 

Hanks  do  not  succeed  in  avoiding  resj)onsibility  by 
printing  in  the  i)ass  books  notices  that  they  will  not  be 
liable  for  the  acts  of  l)anks  to  whom  they  send  items. 
Such  contracts  have  been  held  to  1)e  void  hy  the  courts 
on  the  same  j)rinclple  that  railroads  cannot  avoid  lia- 
bility for  accidents  to  i)ersons  riding  on  j)asses  even 
though  the  pass  bears  on  Its  face  such  a  disclaimer. 

1 '■  a  note  is  payable  at  a  bank  and  funds  arc  kept  to 
pay  it,  the  bank  is  the  agi'ut  of  the  nuiker  and  if  the 


-Vi^ 


300 


MONKV   AM)  UASKISG 


I! 


l.a,,k  I'.il,  l,,f„,r  IIk.  h„i,lc,-  „r  (1,0  „nt,  J,,,,,  ,,„„„,■„, 


ajr»aiii. 


cove,-   t         M  •    ,     "''  •■""'  "'^  ''"""'  '"'"k  'I- 

emus   l,.,l  ,t  has  pa„l  i,v  n  istak..  fiore  hci,,^,  „„  f,„„,, 

tl.e  colfcctu.K  l-ank  is  safe  :■.,  ,-ct„„,i„j,  .i'.  ,„,  ,       i' 

and  recen-n.^.  „„ck  tl,e  check.     The  c„d,„.se,/a 
K-leasc    cvc,  „  ,„.,  „  ,  „.,.,^,,  „^  ^,_^  ^.,^^_,,^  .^  .  ^^  -    • 

The    n  kc-  appcarc,    ,„„I  sai.l  he  ha.l  ,„a,le  an-a„Ke. 
i"U,ts  /,„■  ,ts  ,,.„ewak     The  cashic,-,  h.nvcvc,-,  hisisLi 

recenei    „sln„.|,„„s  to  ret,,,-,,  the  „„te.      lie  se„(  the 
>roeee,ls  M.stea.k      Me  >v„„l.l  „„t  have  hce„  i„s     ie,l 

Z2z!:::i::;:r '''"''-' --'^"'^''-'^''^^'^ 

-M:,    Clhrii,,,,  of  o„t-of-f„!,„  rf«V.-,,-The  collec- 
tion of  o„t-of-to„.„  i,e„,s  is  pe,.l,aps  „„e  of  the   ,e  n      t 

r:,-?,,  ;""""■.  '"-'-•■"  ™i-ia.e,Mti! 

eo.sl  ol  eolh.ct,„^.  an  ,tc,„  averages  ahout  ei„htee„  c-nts 
;   -:'"    as   ,„||o„.s:    Exchange  ,.,  cent,  ^os       e      ,d 

•I  -Heefon  «...     Small  l,„„k.s  shift  the  txpe,,. 
o  the  h„«e,.  hanks  hy  keeping  a-vounts  with    I,        a„.l 
'lq««,t,„«.  all  ,.„„,,,;„„   i|,,„s.      ].a,..e  .,„.   ha,,,;;!' 

;"!"■'■  ^""  '''I'"-'"-  '"  l<"P  I'alances  which  th,.-  :;,,.,,. 
.a  e  a,e  lar«e  c„o„j,h  to  yid.I  a  piv.fit  over  anil  ahove 
the  expense  ol  niakinf.  the  cilleclions 

sv'!u",',;or""T,'''r  "'"'■''  """'''  '■"""  "''"'-'>•  >■•■""<  » 

■  '      ' '",  '■"'""•'"  ' ""■>•  H,eeks  i, „,  sue anncr 

as  <ilx    e,„,.„s  air   ,„>u    collcct.,1   Ihn.ujfh  the  cic-,ri„„ 

;..;.-,  ,i>  w  i  i,^^.,,  ;i(i,)j)ti.,i. 

It  was  pru,,„.,..|  „,   H,„,,„  „,^„  ,„,^,  ,^^^^^,  ^j^^  ^^^^  ^^^^ 


ORGANIZATION   AND  IH'SINESS 


301 


I 


{■(.llcctiii.t,^  for  the  city,  tlius  avoiditi^v  a  large  omnimt 
(if  (liiplicatioii  of  work  and  hoUlin.u-  the  country  l)aiiks 
to  stricter  terms  than  conii)etiiig  city  banks  could  do 
iii(livi(hials.  This  was  the  Suflolk  hank  system,  applied 
to  check  collections.  The  scheme  failed  mainly  because 
the  banks  were  unwilling  to  give  any  one  bank  .the  ad- 
vantage which  such  a  position  would  bring,  nor  to  give 
;my  one  bank  the  o[)portunity  to  learn  so  much  about 
its  affairs  as  the  collection  of  its  items  would  give  it. 

To  avoid  these  dilKculties  it  was  projjosed  to  charter 
a  new  natiotial  bank  for  the  ])urpose.  Init  the  law  forbids 
national  banks  to  hold  stock  in  other  }»anks. 

Schemes  for  dividing  the  country  uj)  into  districts 
with  a  clearing  house  for  each  district  are  impracticable 
because  settlements  could  not  be  made  on  the  same  day 
and  it  would  be  necessary  for  each  member  to  keep 
funds  on  deposit  in  the  clearing  city  to  pay  balances 
against  them,  rurthermore,  the  pro  rata  expense  would 
he  considerable  whereas  now  the  country  l)anks  pay 
nothing  for  getting  their  collections  made  while  they  get 
fees  for  collecting  items  on  other  banks  in  their  vicinity 
or  even  on  themselves. 

;}(;(■>.  l^iifflisJi  iiiitJiod  of  couuinj  coJIi'ctinns.—Vuach 
i'aiik  in  London  receives  during  the  day  a  large  numl)er 
if  ehecks  upon  country  bankers.  I'pnu  these  checks 
the  name  of  the  London  agent  is  printed.  K\  try  clear- 
ing banker  in  London  is  the  agent  for  one  or  more 
countrv  banks.  So  when  the  country  clerks  of  each 
bank  get  such  checks  from  the  cashiers,  correspondence 
department  and  other  som-ces.  they  proceed  to  arrange 
them  lor  clearing  as  they  do  town  checks,  sorting  them 
and  ])utting  them  in  j)ackages  according  to  the  London 
ugencies  at  which  they  are  payable.  No  cre(ht  is  given 
iii  the  clearing  house  for  these  country  checks  on  the  day 


2. 11 


.'502 


•AIONEV  AND  "BANKING 


on  wlnrh  tl.ey  are  delivered.     Tlie  aniounts  are  sin.piv 
.settle<l  !,y  the  deliverino.  clerks  and  the  receivin^r  dcrk; 
an<l   then  the  items  are  taken  t.,  the  respeetive  hank, 
whenee  they  are  sent  hy  „,ai|  the  same  eve..i„u-  to  the 
conntry   l,anks   hy   whom   they   are   pavahlc.      If   these 
cheeks,  reaehu.^-  their  destination,  are   fo.n.d   to  he  all 
n^l.t,  they  are  crechted  to  the  account  of  the   London 
;-urnt  who  is  advised:  h.,t  if  any  of  then,  are  not   all 
n^ht,  either  fron:  insufheient  funds  or  irre-ular  endorse- 
ment   or  any  other  cause,  sueli  irreuuhir  cheeks  are  re- 
turned direct  to  the  hanker  whose  crossing  thev  hear 
All  country  checks  not  returned  or  advised  hv  thJ  morn- 
ing oi  the  third  day  are  assumed  f     Se  paid!  and  credit 
is  accordmn^ly  «iven  for  them  in  the  clearm-  of  that 
day  and  the  amount   is  settled   for,  alon.-  with   those 
advised  T,aid,  in  the  final  halance.     All  countrv  checks 
lield  hy  London  hankers,  returned  unpaid,  must  he  re- 
turned mto  the  hands  of  the  clerk  representino-  the  deliv- 
ering hank  hy  V>:liO  on  the  third  day,  and  thev  are  simply 
(  educted   from  the  total  of  the  countrv  cl/ecks  on  the 
day  of  settlement. 


*L.« 


;«#"■  ■  T 


CIIAPTKU  XX 


Di.l'OSITS  AM)   Dl.l'OSriwRS 


'.W7-  General  di  po.siis.  l)i'|)()sits  are  of  tw^  kinds, 
-( iicral  and  special.  Cieneral  deposits  are  always  moiuv 
(ir  the  ri^Iit  to  receive  money.  They  ei-eate  between 
the  bank  and  the  customer  the  rehitioii  of  debtoi-  and 
creditor.  The  rclati(Mi  is  pecuhar  in  that  tlie  bank  not 
iiiily  contracts  to  pay  the  debt  on  demand  (unless  the 
deposit  is  a  time  deposit)  but  also  agrees  to  pay  to  the 
order  of  the  depositor  any  sums  within  the  total  amount 
dl'  the  deposit,  and  if  it  i'ails  to  do  so  it  may  l)e  sued 
in  damaii'es  bv  the  depositor.  The  baid<  mav  satisfy  the 
depositor  by  the  payment  of  le<jial  tender,  no  matter 
liy  what  form  of  money  the  debt  was  created  or  how 
iiiiieh  the  le^'al  tender  may  have  depreciated.  Tho  lethal 
ttiider  acts  during  the  Civil  War  period  were  more  im- 
portant to  l)anks  than  any  other  class  in  the  community, 
tliese  acts  ])ermittin<4'  the  banks  to  pay  their  depositors 
(kj)reciated  ])aper  money,  even  though  the  depositor 
ii;id  deposited  ^old.  At  that  time  it  was  the  custom 
;niion<;'  the  banks  to  oj)en  special  ^old  accounts  all  the 
payments  on  which  should  be  made  in  fjold. 

.'}(i8.  Speeial  depomts. — A  special  deposit  may  consist 

of  anythino-  of  value  left  with  the  bank  for  safe  keej)in^. 

The  relation  between  the  baid<  and  the  de])ositor  in  such 

a  case  is  that  of  bailee  and  l)ailor.    The  title  to  the  deposit 

does  not  pass  to  the  bank  as  in  the  case  of  a  <>'eneral 

iji  riosit.  but  v(^sts.  !!!  ib.c  <l'.'i)()sit(>r.      'i'he  bank  is  ludd  to 
i'    -■■-  -----   -- ' '  I ---  --- 

use  only  ordinary  care  in  protecting  it  and  if  it  is  stolen 

303 


304 


MOSK\    AM)  RANKING 


li^f 


Avitliout  iicnlioviKT  on  [hv  part  of  the  l);ink,  the  owner 
imist  hear  the  loss.  Tlie  hanker  must  return  to  the  de- 
positor the  ivleiitieal  thino-  deixisited.  If  the  hank  ac- 
cepts a  eousideratiou  I'or  keepiiio'  tlie  deposit,  it  is  held 
l)y  law  to  exercise  ^n-eater  care. 

.'J(ii).  Safct//  deposit  rowZ/.v.— IJecausc  the  banker  was 
the  oidy  husiiiess  man  in  the  smaller  j)laces,  possessin<r 
a  sale,  it  was  formerly  the  custom  for  him  to  receive  tlu 
valuables  of  customers  for  safe  keeping'.      Nowadays  the 
banks   derive   a    profit    from   the    function    whieh    was 
formerly  a  source  of  ^reat  aimoyance  to  them,  and  tlu y 
liave  estal)lished  safety  deposit  vaults  the  l)oxes  of  which 
are  rented  by  the  year.     These  a  aults  are  not  only  profit- 
able on  account  of  the  rentals  they  earn  but  also  because 
they  act  as  a  feeder  to  tlie  bank.     Many  people  who 
will  not  trust  the  bank  with  their  money  will  rent  a  box. 
This  hrin<,^s  them  into  touch  with  the  officials  of    the 
bank,  and  as  a  rule  whatever  suspicion  they  had  grad- 
ually disai)j)ears,  so  that  ultimatelv  thev  become  regular 
depositors  either  in  the  savincrs  or  commercial  depart- 
ment, especially  if  the  bank  pays  interest  on  deposits. 
:J70.  Inducements  to  depositors. — We  learned  in  the 
I)recedin^-  chapter  that  a  cash  deposit  enables  the  bank 
to  loan  credit  from  three  to  six  times  Its  amount.     It 
is  quite  possible  for  a  bank  to  make  1.5  to  20  per  cent  on 
the  (le|)osits  left  with  it.     Hence  there  is  nrreat  conijieti- 
tion  aiiion^r  banks  for  tleposit  accounts  which  are  likely 
to  he  fairly  permanent.     In  return  for  the  use  of  the 
general  dejxisit  which  is  so  protitalile,  banks  liave  been 
led   by   e()m})etition   amon^  themselves  to  offer  many 
valuable  services  to  the  depositor.     Among  these  are  the 
following: 

(a)    Checks. — It   pays  the  checks  of  the  depositor, 
taking  the  risk  of  their  being  genuine  and  that  the  money 


DEPOSITS  AND  DKl'OSnOUS 


305 


is  paid  to  tlif  i)frs()n  dcsiniiatrd  hy  \\\v  depositor  or 
Ills  order.  liis  serxiee  is  ol  nrcat  \aliic  to  the  dej)ositor 
as  it  saves  Iiiiii  the  iiiconvenieiiec  ami  the  expense  of 
iiiai<iii^"  eash  payments. 

(h)  Collections. — The  hank  eolleets  the  cheeks  and 
;ill  iitlier  items  of  credit  for  the  depositor,  often  at  eon- 
siderahle  ex[)ense.  It  offers  tlie  depositor  a  cheap 
and  easy  way  to  collect  accounts  due  hy  draw  iiiii'  si^^'ht 
drafts  on  his  dehtor  and  collectin<''  them  throu<>!i  his 
hank.  Since  the  ^'row  th  of  the  custom  of  sending-  local 
checks  in  making-  small  payments  to  city  houses,  such 
for  exami)le  as  the  one  dollar  subscription  to  magazines, 
the  associated  hanks  in  several  of  the  larger  cities  have 
hi  en  compelled  to  estahlish  a  unilorm  fee  ('or  collecting 
cwi-of-town  checks,  the  rate  usually  heinif  |'^-  of  1 
per  cent,  with  a  mininiuni  diarize  of  10  cents  per  cheek. 

(c)  Safctif.—'Vhe  bank  relieves  the  depositor  of  the 
risk  of  caring  for  his  money. 

(d)  Loans. — The  bank  usually  feels  under  obliya- 
til  111  to  loan  to  a  depositor  on  more  advantaffcous 
terms  and  usually  on  less  rif^id  requirements  than  to 
non-depositors.  It  can  do  so  because  it  is  moie  or  less 
a((]naintcd  with  the  affairs  of  the  depositor  and  can 
accej)t  personal  credit  when  other  parties  would  i-e(jiiire 
collateral  security.  The  greatest  advantage,  however, 
(•->nies  in  times  of  panic  when  funds  are  needed  most 
and  when  all  the  banks  are  refusing  to  loan  to  others 
than  their  dc])ositors. 

(e)  Interest  on  balances. — Sometimes  the  })anks 
p.iy  interest  on  the  daily  balances.  This  practice  \sas 
111  innovation  of  the  trust  companies  and  was  due  to  the 
fact  that  the  (le])osits  in  the  banking  department  of 
the  earlier  trust  com})anies  were  practically  time  de- 
posits.    \Vhen  the  character  (d'  the  deposits  gradually 

Vii-jo 


•\m 


■AOC) 


MCNKV   AM)  H.\M\l\(i 


i 

ii;'i 


3",   ?^ 


I). 


c'li;m^c(l  the  CMstdin  still  prevailed,  imich  to  the  vexation 
ol'  the  national  hanks. 

(f)  lucrcdsi's  credit.-  'Vlic  hankin^r  coni^eetion  f'l-e- 
(juently  inereases  the  en  (lit  of  the  husiness  man.  A 
^ood  Imnkinn-  reCerenee  is  Creijiiently  ol'  <^reat  advantaii'c 
in  husiness.  and  the  l.>anks  must  he  eonstantly  on  tlieii- 
^nanl  against  persons  who  use  their  eonnectiiin  with  the 
hank  to  uain   unmerited  eredit. 

.'J71.  Dillicultic.s  ill  cstahli.sliing  a  ncx  hank. — It  is 
very  dilllenlt  to  estahlish  a  new  liank  in  a  communitv 
already  sujjplied.  If  the  old  hanks  are  not  willin/jf  to 
aceoinmodate  their  eustomers  freelv,  and  if  thev  chariie 
for  making-  eolleetions  or  refuse  to  loan  exeept  on  oner- 
ous terms  as  to  i-ate  and  security,  a  new  institution  nia\ 
attract  many  depositors  hy  superior  inducements,  pai- 
tieularly  hy  paying  interest  on  deposits.  Too  man\ 
concessions,  on  the  other  hand,  may  cause  the  new  hank 
to  lose  credit  for  soundness;  it  may  he  inclined  to  taki 
great  risks  in  loaning  in  order  to  reco\er  the  amounts 
j)aid  out  as  infei-est  to  depositois  and  in  the  expensi\e 
sei'vices  performed  for  them.  There  usually  is  no  dilli- 
culty  in  finding  horrowtrs  for  tiie  funds  of  the  ru  u 
hank;  in  e\ery  community  thire  aic  always  husiness  nn  ii 
of  unsound  methods  who  ha\e  hecii  refused  credit  In 
the  old  hanks  and  who  wilcotne  the  a|)pearancc  of  ;i 
new  \nii\k.  hoping  to  estal)lish  relations  with  it.  They 
try  to  place  the  hank  under  ohligations  hy  opcnitig  di- 
posit  accounts. 

'A7'2.   f'tiliic  of  (I  hdiiJ.iii^'  coiiiiiclioii. —  Many  well  cs- 
lahlished  hanks  ari'  eiiahled  to  hold  thi'ir  depositors  w  itli 
out  paying  interest  on  di])nsits  against  the  competilioii 
ot'  the  trust  companies  hecause  they  offer  the  (lcp()sit(n- 


i)i;iM)si'i>^  AM)  Di.i'osn  ()i{s 


;j()7 


ii.iiiicly.  credit  in  limr  of  need.  When  m  panic  comes 
Mri'l  (\eii  str()n<i-  business  concerns  .ire  in  (lan<Jer  ol' 
liankruptcy  tlirou^lt  ieiiij)ora!'y  need  of  I'und.s.  the  op- 
portunity of  the  liank  to  render  svr\  ice  is  very  ^reat. 
A  suiall  loan  at  the  |)rnper  time  may  count  i'or  moi'c 
than  interest  on  (hposlts  t'oi-  many  yeai-s.  Depositoi-s 
Kinain  !o\al  to  ohl  consei'x  atiw  hanks,  knowint''  th.it 
the  hanks  \\i!l  i)r()hai)ly  ha\e  a  chance,  sometime,  to 
rendei'  reciprocal  sei'\  ice.  Ilouexcr,  ;is  business  (on- 
ccriis  ^rou  richei-  and  less  dependent  upon  hank  credit 
for  existence  this  inducement  will  lose  its  force. 

:}7-J.  Kiliiif/  chi'clc.s  (111(1  (Ivdfls.  The  ])raeticc  of 
"kiting"  is  ;i  st.Mrce  of  urcat  annoyance  to  hanks.  It 
^  practiced  hy  depositoi's  who  wish  to  s^ain  the  use  of 
liiiids  for  a  siioi't  time  without  payment  of  intensl.  It 
;■-  |i!issilile  to  accomplisji  this  hi'cause  of  the  custom  of 
Kinks  of  nix  iiiu'  credit  imme(hat(l\-  upon  deposit  I'oi' 
cliicks  and  drafts.  e\  in  though  the\-  ai'e  drawn  on  dis- 
tant citii's.  Kitinn'  re<]uires  tlu'  collusion  of  two  pai'tits 
located  some  distance  .apai't.  It  e.in  he  most  easily  done 
hctwecii  branches  of  the  same  concein. 

ISIX.  Miiliod  (>l  " hiliin/.  '  To  illustrati'  the  practice 
I<  I  Us  assinnc  that  a  <lepositor  in  \ew  ^'or|•.  draws  a 
siiilit  draft  or  deposits  a  chick  reccixed  from  :i  fon- 
fcdcrale  in  San  I'laneiseo.  Tin-  bank  will  permit  the 
Niw  ^  oik  d(  j)(>sitor  to  check  .-i^ainst  the  cr<  dit  even 
IIm'U^Ji  IIk  b.'uik  wdl  not  i'eali/.(  die  proceeds  of  the 
check  oi  draft  within  nii''  or  two  weeks.  It  will  riiiiiire 
at  least  a  wvrk  lor  the  cheek  or  dr.ift  fct  reach  San  I'lan- 
'•isco  and  be  prcseiitid  to  the  ennhderate  lor  pa\nient. 

'irip.itino-  the  .irri\al  of  tin  bMI  auamst  him  the  con- 
Icdcrate  will  provide  credit  at  his  bank  by  dej)ositin^ 
tl 'I'C  a  (ir.'ift    or  ebick    on    .1    liilnl   <'<  m  !'<  / 1<  rO.       iwiliiii.^- 


308 


MONEY  AM)  H.\NKI\(; 


h 


in  New  Oilcans.  Thus  Iwo  oi-  three  {X'l'sons  ?niiy  have 
the  use  ol'  eoiisiderahk  sums  ol'  money  lt)r  some  time 
without  payment  ol'  inteiist. 

.'}7.).  7V//c  /o  (hjK)siU(l  clicchs,  etc. — Tlie  title  to  paper 
deposited  in  a  hank  '.'ten  heeomes  an  imi)ortant  (pies- 
tion.  It  is  a  rule  of  law  tliat  it'  the  items  de})osite(l  in 
a  hank  arc  for  colleetion  and  not  for  credit  on  the  re<r- 
ular  account.  tl;c  title  docs  not  pass  to  the  hank  hut 
remains  in  the  dcpositoi  until  the  proceeds  have  arrived 
at  the  hank.  In  tliis  ease  Mic  l)ank  is  simj)ly  the  a^eiit 
<)!'  the  oufier,  and  the  [jt'occeds  oi"  the  collection  are 
trust  I'nnds  whieh.  ii'  they  can  he  traced,  must  be  re- 
turned t.»  the  ownei'  in  spite  of  insolvency  of  the  parties 
holdiu/^'  thetn.  I  f  the  paper  is  endorsed  'for  collection" 
there  is  no  douht  as  to  the  owmrship.  hut  when  it  is 
endorsed  in  full  or  in  hlank  the  owtici'shii)  dei)ends  en- 
tirely upon  the  a^^rei'inent  hetween  the  depositor  and 
the  hank.  I  f  no  agreement  has  heen  made  the  hv  holds 
that  the  deposit  is  for  credit  and  that  the  hank  actpiires 
title.  If  the  hank  should  fail  the  depositor  must  take 
1ms  chanc(  s  with  tin  otlnr  dep(»sitoi-s.  hut  if  the  agree- 
ment has  heeti  that  the  items  diposiS.d  arc  for  collec- 
tion. Ol  il'  they  ha\e  iieeii  endorsed  plainK'  "for  col- 
Kction.  "  liie  (l(  p(»it(ir  is  a  j)ref(  i-red  creditor  and  is  j)aid 
hef(.re  all  ollk  r  depositois. 

I  iiless  the  item  is  endorsed  *'|"or  collection"  or  they 
iia\e  notice  otherwise,  innocent  thii'd  parties  who  enn- 
sider  the  item  llu  propeiiy  of  tlii'  hank  and  seize  it  to 
pay  any  <le')ts  of  the  haiik  then  ha\int,^  it.  cannot  hold 
to  lh(  iiile  longer.  The  law  on  this  point  was  clearly 
hud  down  in  ilii'  ease  of  I)o|)i)tlt  \.  National  hank  ot' 
the  Hepuhlic' 

:i  ../    .;.  .  .;. 


'  No.  I,  Niiliiiiiiil  Hiiiik  Cas«*s, 


,;., 


DEPOSITS  AND  DKPOsriOHS 


309 


y  have 
le  time 

I  paper 
:  (pus- 
ited  in 

ik  Init 
irrivcd 

a^X'iit 
:)n  are 

lie  ri- 
[)art!cs 
.'ction" 
ii  it  is 
ids  cii- 
)r  ami 
■  holds 
'(|uiies 
it  talxL 

collcc- 
)]•  col- 
is  [)ai<l 

r  thty    I 

I)   con-     "k 

i 

L'    it    to       I 

t  hol<l  I 
•Icarly  g, 
jik  I 


..../. 


ched 


I 


Dopj)cit  deposited  w  ith  his  l)ank  a  check  endorsed  in 
hiank  for  collection.     The  hank  endorsed  the  cheek  "for 

(oll( ction  to  the  credit  of Hank,"  ( insei-tin^'  its  own 

name ) ,  and  sent  it  to  the  National  Hank  of  the  Uepublie. 
Dnppelt's  hank  failed  the  next  day  owin^'  a  considerable 
amount  *;>  the  National  Hank  of  the  Repuhlic.  The 
lalttr  sei/.ed  the  jjroceeds  of  the  check  after  it  had  been 
(•('liK'ted  in  order  to  satisfy  the  debt  due  it.  Dojjpelt 
surd  il-c  National  Hank  of  tlie  Kei)ublie  lor  the  funds, 
ilaimin;^  that  his  own  l)ank  had  accjuired  no  title  to 
thi  (luck.  Heoardlcss  of  the  agreement  between  hini- 
M  If  and  his  l)ank.  Doppelt  could  not  recovei-  because  the 
National  Hank  of  the  Uepublie  had  no  notice,  nor  could 
it  have  leaiMied  IVorn  the  endorsement  of  l)opi)elt's  bank, 
that  it  was  not  the  owner  of  the  check.  The  law  per- 
mitted the  National  Hank  of  the  He|)ublic  to  regard 
IIh  check  as  bein^v  the  j)roj)erty  of  Doppclt's  bank. 

Ml.  Acccpihi^  deposits  xchcu  insolvent  is  criminal. — - 

lie  icceipt  of  deposits  by  an  insolvent  bank  is  clearly 

a  Iraud  and  the  ollicers  who  take  (iei)osits  are  guilty 

nf  eriininal  oll'ense.  ])unishable  by   inii)i'isonnient.      In 

iMti\  icling  an  otlicei-  of  a  bank  of  this  cjiarge  it  is  neces- 

^al y  io  j)rovi'  thai  he  knew  the  bank  to  be  insolvent  when 

lie  rec(  i\cd  the  d(|)osit.     'I'he  InsoUtiicy  of  a  bank  is  a 

\ery  diflicult  inattci'  to  deti'rniine  sonictinies,  l)ecause  it 

li  peiids  upon   tlu'  \ahir  ol'  the  loans  and  discounts  in 

its  assets.      While  the  olliceis  may    know   that   sonic  of 

'"  lo.uis  are  not  first  class  and  !iia\  not  be  paid  promptly 

\<t  they  may  beliexc  them  to  l)c  good  ultimately. 

•MTH.  Dri.tx'vr  niciscd  fr>iii!  r(  sjio'isihiUt //  aflrr  riui- 
sdiKihlc  tinw.  The  drawei-  of  a  i-Ji. ck  is  always  liable 
foi'  tli<'  ultimate  payment  in  case  tin  liank  should  fail 
iielore  it  IS  cashed.      Iloutver,  in   ordi  r  to   pniiect    tiie 


drawer  ol  cheeks,  tin 


a\\   reiiiiiii 


that 


a  clieelv   imis 


t  be 


:nu 


.MOM'.V    AM)   IJANKINC; 


i' 


})rf.s«')ik-(l  to  tlif  hank  foi-  j)iiymciit  witliin  a  reasniialjlc 
time,  othcTuisr  tlir  lioMrr  of  the  duck  must  assume  tin- 
lisk  of  the  f'aihu-e  of  the  hank. 

.•J7!K  Local  hdiihs.  \u  the  ease  of  a  loeal  l)ank  the 
courts  liave  held  that  a  irasonahle  time  means  until  tin- 
close  of  the  husiness  day  t'ollowino-  the  ddiveiy  of  the 
check.  11"  the  payee  should  endorse  it  to  another  party 
on  the  second  day  and  the  endorsee  should  hold  it  still  an- 
other day  hefore  presenting-  it.  the  hank  iailino-  in  tlic 
meantime,  the  ori<>inal  drawer  would  he  released  and  the 
payee  he  eomixlled  to  reimhurse  the  jiolder  or  endorsee, 
hecause  the  lattir  had  jjresented  it  for  })ayment  within  a 
reasonahle  time  after  reeeivitin'  it.  In  the  ease  of  ehecks 
drawn  on  hanks  outside  the  city  in  .  hic-h  the  drawer 
resides,  the  cheek  must  he  forwarded  on  its  way  hefore 
the  close  (d'  the  next  husiness  day  in  order  to  hold  die 
drawei-  responsihie. 

.'{HO.   Hohhr  of  a  clitch  c(ui  iiol  .sue  haul-.      Tn  nearly 
ever\    state  a  hank  on  which  a  check  is  di-awn  is  under 
no   le;4al   ohlioalion   lo   tin-  holder   to   pay   or  accept   it. 
win  Ihei'  the  maker's  funds  ai-e  sullicient  for  this. purpose 
or  not.      Of  ronrsc  if  the  hank   has  ;iceepte(l   the  check 
hy  (■(  ililicatioii.  then  I  in    holder  has  ;i  claim  against  tin 
''••'"'-•      I  I' ;i  '•■■'Ilk  should  (hvlinc  without  a   \aii.l  rtasdn 
to  j)ay  a  check  dr.iwii  on  a  siitlicic  nt   fund  helon^in..'  Id 
its  de|)ositor  the  iiisl  it  iit  ion  would  he  liahle  for  wliate\tr 
injury    the   d(  positor   sustaiiie.l.       1 'or   example,    should 
a  liaiik  decliiK   to  |»ay  ,i  cluck  sii|)])osiiio  tli.it  the  makt'r's 
depMsil   was  iiisiillicicnt  when  in  truth  it   was  ample,  the 
institution   w<Mild   he  lialile   for  the  eonsi  .jnenees  of  thi^, 
(hshononn.L;-    his    order.    (\(ii    thoii-h    its    condm't    was 
'"iinded   on    the   mistaken    c.ilciilat  ion   of  a    hookkicper. 
.'ihl.    ill  ,  (icdiidii.       i  ii(      iepositor  iias  tlie  pri\  iltM.c  ,,r 
^t<'ppil!,:^    paNiiHiil    on    a    check.    ;uid    the    hank    will    he 


.%- 


i)i:iH)siTs  AM)  Di'.rosri'ou* 


;}]  1 


nk  \hv 
itil  t!ic 

of  tllC 
■  ])ai1y 
till  ati- 

iii  till' 
nd  tJK' 
lorsce. 
ithiii  a 
flu'cks 
Irawfi 
l)el't)ic 
id  the 


lialil''  for  the  anioutit  if  it  pays  the  clitrk  in  spite  of  the 

stop  order. 

TIr'  death  of  a  dei)ositor  works  a  rrvoeatioii  of  all 
tile  eheeks  not  yet  paid  just  as  soon  as  the  bank  receives 
notice  of  liis  death. 

882.  Insufficient  funds.— If  tlie  credit  account  of  tlie 
(K[)ositnr  is  insuthcient  to  pay  the  full  amount  of  the 
cheek,  the  hank  lias  no  ri^ht  to  pay  a  part  of  the  sum 
with  the  funds  on  hand.  On  one  occasion  when  a  l)ank 
refused  to  pay  a  check  where  the  funds  to  the  credit 
of  the  dejxisitor  were  insufhcient.  the  holder  of  the  check, 
r.  arin^'  that  if  there  was  delay  he  mi^ht  not  receive  any- 
thin;;  on  account  of  the  emharrassment  of  the  drawer, 
(Kposited  to  the  account  of  the  drawer  a  sum  suiHcient 
t(.  cover  the  amount  of  the  check.  Thereupon  the  hank 
!iad  no  ri^'ht  to  refuse  payment. 

;{S:}.  Forgeries. — The  l)ank  is  presumed  to  know  the 
sitiiiatures  of  its  depositors  and  it  cannot  pay  a  forced 
cluck  and  charge  the  account  of  tlie  depositor  with  the 
aiuoimt  of  the  check.  The  principal  excejjtion  to  this 
rule  is  in  the  case  of  a  check  so  neoliocnlly  dr-iwn  that 
an  alteration  is  easily  made.  The  hank  that  pays  a 
I'orii-ed  check  cannot  recover  the  money  from  the  iiino- 
( .  lit  pavee.  This  seems  a  hard  rule  as  both  are  imioeciit. 
but  as  ^rreater  vigilance  on  tlie  i)art  of  the  iiank  nii.uht 
have  discovered  the  for^a-ry  it  must  i)e  held  respousilile. 
'Mi.  Post-dating:-  '^oun-Uuivs  cheeks  are  post-date.!, 
that  is,  bear  a  later  date  than  the  one  on  which  tluy  are 
written.  The  object  of  this  is  to  ..''tain  ddav  in  mak- 
ing- payment,  tlie  drawer  simply  desMin^i'  time  in  uliieh 
to  have  the  money  in  the  bank's  possession  on  tlu'  date 
specified.  The  bank  that  pays  an  ;ilt(ic>l  post-dated 
(litik    before    its    due    date    i-aiinoi    elnck    tlie    amount 


It 


1, 


a^-ainst  the  drawer.      In  no  ease  can  a  eliei'k  ] 


laiti 


ore 


-312 


MONEY   AND  BANKING 


f'T 


11.   tnn.  spenhec    he  c.|,a,...l  to  tlu-  d.aue.-'s  account. 
.iHo    Srf-of.-^lhv    rdation    iHtuccM    the   har.k   and 

<n-s.o,.,s  that  of  dehto..  and  creditor:  therefore  either 
Pa.ty  has  the  r.o-ht  to  set  off  his  ,leht  to  the  other  uith 
;n.y  e  am,  he  n.ay  have  against  him  or  it.  For  instance 
.1  A  has  a  deposit  of  $100  in  a  har.k.  the  hank  is  his 
'l^-I'tor  lor  that  sun,:  hut  if  the  hank  holds  an  ur.sccurc,' 
jnul  matured  note  against  A  for  ^.50  the  deht  of  the 
f'ar.k  to  A  is  only  $oO-the  diiferencc  hetneen  the  credits 
and  debits. 

.•iS<J.  fncn  a  dcpoKifor  fails,  Hs  uoW  not  hcin^  se- 
cured.- 1  h,s  point  is  of  consi.lerahle  conse(,uencc  when 
one  or  another  of  the  parties  have  heeome  insolvent.  U 
the  depositor  fails  owing  the  hank  on  an  unsecured  note 
whether  n.atured  or  unn.atund,  the  hank  can  sei/e  the 
Jlqx's.t  to  satisfy  the  note  unless  somehodv  has  a  prior 

^en  upon  itfor  instance,  an  attachment:  ;.r  in  Ilhnois. 
South  Carohna.  Kentucky.  Nebraska,  or  Texas  when 
a  cheek  ..peratcs  as  an  assignment  of  so  much  of  the 
<lci'"s.t     a   che<k   holder,  after  he   presented   the  check 

won  ,1  have  a  chum  superior  to  that  of  the  ha.ik.  Simr 
n.solven.y  caused  all  unmature<l  obligations  of  the  in- 
M.lvcnl  p,.,.son  In  b,.,nnu.  at  onee  ,lue  au.l  pavable.  the 
'^o.kc.uld  apply  a  deposit  on  such  a  note.  If  the  note 
.as  secunly  the  hank  must  (irst  satisfy  the  note  from 
the  securit\-. 

;|.sr.  Advantage   In   ././W.r.-If   the   bank   should 

:'-''''••';  I'--'';;''  n.ay  s,  loir  his  note  to  the  bank  with 
Ins    d.pos.t.       Ih,.    receiver   cannot,   of   eourse.   enforce 

;""',^'"",""  ""•""'*■  "'"'''"  ".aturesbu!  the  depositor 
I'.-'s  Ins  elaim  against  Ih..  bank  u  in  never  the  note  is 
IMVsented  to  hi.n.  The  nveiver  cumo,  avo|<|  this  set- 
;:;\;-,"V;7^'*'"   ■'"'*■  '"aninnoeenl  I  hinl  party,  for  th,. 


I'act  that  the  not 


V  \^as  piiic|ias/(|  I 


I  oil!  a   reeeixtr 


"•oui<l 


DEPOSITS  AND  DEPOSITORS 


313 


I 


lit  notice  of  irregularity.  If  a  note  after  maturity  was 
iR<4()tiate(l  by  one  bank  to  aiiotber  and  the  first  bank 
t'aikd  hol(lin<r  a  deposit  of  the  maker  of  the  note,  tlie 
maker  eould  use  his  deposit  to  off-set  the  note,  because 
tilt'  second  bank  was  not  a  bona  fide  holder  and  took  the 
note  sul)ject  to  all  equities  between  the  maker  and  the 
tiist  bank. 

:\HH.  Set-off  maki's  failure'^  appear  tcnrsc. — Since  a 
larne  portion  of  the  loans  of  a  bank  are  made  to  de- 
[iMsitors,  whenever  a  bank  fails  a  considerable  part  of 
tlie  assets  are  canceled  l)y  an  equal  amount  of  liabilities 
in  the  shape  of  (!e])osits.  Depositors  who  are  also  bor- 
louirs  are  really  in  the  position  of  ])referred  creditors 
for  their  (lej)osits  and  they  oain  at  the  ex])ense  of  de- 
pnsitors  who  ai'e  not  also  borrowers.  Therefore,  in  a 
1  ank  faihu-e  where  a  ;>()  per  cent  dividend  is  paid  to  de- 
[Misitors.  the  failure  is  not  so  bad  as  this  fi<,nn-e  indicates, 
Inr  a  large  number  of  depositors  may  also  have  been  bor- 
ii'\\(rs  and  lunc  lost  little  or  nothing, 

:{H!>.  Illustration.— A  bank  witii  Sr^l, 000.000  loans  and 
si,()()(M)()0  deposit  liabilities  fails.  1  f  half  the  loans  are 
iiffsft  by  deposits  there  remain  .%')()0,000  of  loans  with 
\\!iieli  to  pay  .%")00,000  deposits.  Supi)ose  the  loans 
nali/.e  M)  pvv  eeiit  of  their  face  value  w  hen  licjuidated, 
<  n-  would  then  be  .$2.50,000  to  be  distributed  to  depos- 


IC 


le  (!'  positors  who 


itnis.  or  a  ,•)()  ptT  ci.,,!  di\  idcnd.      I  ( 

\^'  If  also  borrowers  had  not  been  allowed  to  offset  their 

(I 


Itligalions  with  their  deposits,  the  assets  collected  would 
iuive  been  !i<7.') 0,000.  which  would  have  l)een  distributed 
iitiiong  all  the  depositors  having  claims  of  .$1,000,000; 
lliat  is.  each  depositor  would  have  received  a  7.'>  per  cent 


ili\  i(l<-nil 


,.  1., 


I....I 


as 


tl 


le  percentage  of  divide  nds  indicates. 


•*''0.  Form  of  note. — Some  l)anks  use  a  form  of  note 


HU 


-AIOM-.V   AM)  HANKINCJ 


similar  to  the  f'ollouin^-  in  which  the  horrowcr  specificailv 
agrees  to  permit  the  hank  to  transfer  t(;  itself  in  ease 
of  his  insolvency  any  deposit  credit  or  other  form  of 
indehtedness: 


I'l  V  A  N  STO  S  ,      III 


.19. 


""'■'■  '''''•■ ITDinist.  to  pay  to  fhf  order  of 

STAIK    HANK   OF    KVAXSTOX, 

With  interest  at  IHr';:,:;."  ,,;;  ani„;„.  aft.r   ;.•.■.■.•.•  at  tiTX 

of  sa„l  H,..„k,  X  ,1m..  n....iv...l.  I„  ....s,.  of  the  insolvency  of  the 
>m.le,s,p„..l  any  In.leMedne.s  due  fron,  the  lejral  hol.ler  hereof  to 
tl"'  M.ulerMfrn,.<l  n.ay  he  appropriated  and  applied  hereon  at  anv  time 
as  well  hetore  us  after  the  maturity  hereof. 

\o 


C'lIAPTEU  XXI 


LOANS  OF  THK   BANK 


3!n.  Tico  qualities  iicccs.sar//  to  the  ir  iking  of  a 
htinlicr. — The  succcssl'ul  l)ankc'r  who  lias  llie  entire  le- 
spoiisihiHty  ol'  his  bank  upon  his  own  shouhlers  must  pos- 
sess two  <|uahHeati()ns  ahiiost  opposite  in  eluiraeter. 
I'ikU'I-  former  eoiuhtions  eonservatism  was  the  distin- 
«4uishin<4-  (luahtyof  a  good  hanker,  hut  with  keen  compe- 
tition in  the  business  he  must  add  to  eonservatism  in 
planting  loans,  ao^^'ressiveness  in  seeui-ing  deposits.  In 
a  lar<4e  bank  the  two  functions  can  be  specialized  in  dif- 
I't'ient  men.  The  point  of  view  of  the  ot!icial  who  makes 
the  loans  should  be,  first,  to  avoid  losses  and,  second,  to 
make  money:  in  these  good  judgment  is  more  to  be  de- 
sired than  enterprise. 

Mr.  William  I^aw,  vice-])resident  of  tlie  Central  Na- 
tional Kank  of  Philadeli)hia,  iti  an  un])ublishe(l  address, 
Ims  made  a  fourfold  classification  of  bank  boi-rowers. 

'■V.)2.  luvcstiiioit  /oc/;/. v.-  First.  inve>iment  borrowers 

pai-ties  who  borrow  to  invest  the  funds  of  the  bank 
in  certain  secvnities  or  property  which  they  Mish  to  carry 
with  a  view  of  reselling  at  a  profit,  or  of  holding  until 
I'liiids  can  be  accumulated  to  i)ay  for  the  purchase,  or 
iif  enabling  the  holder  to  gain  certain  control  or  infiu- 
I  iKT.  or  of  otherwise  accomi)lishing  some  object  external 
to  the  transaction.  Such  are  the  loans  ordinarily 
granted  brokers,  investment  bankers,  and  market  opera- 
tors, lliese  loans  can  be  readily  irali/rd  upon  m  piw- 
[)ortion  to  the  coincrtibility  or  salaltility  of  the  collateral; 


316 


m 


MONKV   AM)  liASKlSC. 


It 
it 


utt 


L*-* 


tlKit  ,.s  to  say.  uudvv  normal  conditions  such  a  borrower 
^^ 'II  pay  ns  loan  at  one  hank  by  ..||in«-  the  seenrl^ies 
pledged  there  or  by  borro\vin<..  t'rom  another  bank 

-'m.  Cuu'litinns  under  tchlch  the,,  arc  fraud  hnukin->- 
/o...--Loans  oi'  this  eharaeter,  if  they  are  obli^atio,;; 
of  aetive  and  capable  n.en,  and  especially  if  pavabl.   on 
clenumd  and  secure.l  by  well-,hstribute<l  and   properly 
n.av^uu.d  collaterals  possessing  a  broad  market,  are  an 
JNcellent  nnestn.ent   for  a   portio.i  of  the  fun.ls  of  a 
•mnk.     Ilouever.  when  money  is  rednndant  such  loans 
at  tunes  y.eld  a  lower  rate  of  interest  return  than  the 
■•ate  paid  by  banks  in  reserve  and  ce.itral  reserve  cities 
"Pon  tne  daily  balances  of  their  out-of-t..wn  correspond- 
ents.     In  recent  years  the  rates  upon  such  loans  have 
rano-ed  from  ll  .  to  2  per  cent  for  several  consecutive 
"lonths.     In  times  of  o-reat  financial  stringency  reali- 
^t,on  upon   such   loans   is  often  excee.lin^ly   d'iffic.dt. 
Ihe  bank  having  loans  secured  by  a  large  hnj  of  certain 
securities  may  lu-sitate  to   force  their  sale,  fearing  to 
break  the  market  and  thus  reduce  the  market  value  of 
similar  securities  on  other  loans  or  injure  the  market 
price  of  securities  belonging  to  their  friends  and  business 
associates:  but  we  are  compelled  to  recognize  the  fact 
that  under  our  system  of  a  bond-secured,   non-elastic 
currency,  with  its  Mell-known  central  reserve  city  and 
reserve  city    features,  call-loans   upon   stock   exchange 
collateral  affonl  a  reasonably  safe  and  exceedingly  con- 
venient method  of  util,/ing  that  portion  of  the  loanable 
funds  of  an  aetive  bank  in  a  financial  center  which  is  not 
employed  m  eanng  for  the  rciuiiemenls  of  traders  and 
nianutaelurers. 

.304.  Industrial  /w;/.9.— Second,  automatic  or  seasonal 
"orrowers.  Hy  these  terms  it  is  intended  to  deseril)e  the 
operations  of  manufaelnrers.  meiehants.   farmers,  dro 


LOANS  OF    IHK  BANK 


3r 


virs.  and  otlicr  like  IjorrowtTs  who  r(.(iuire  lt'in])orai-y 
acroniinodatioii  (liiriii<^  a  ])eri()(l  of  product  ion,  transi)or- 
tation.  distribution,  oi-  collfction.  To  illustrate:  A 
(■i»ii\frter  oi'  cotton  o'oods  must  jjay  the  coniinission  iner- 
rliant  or  manufacturer  for  his  raw  material,  for  instance, 
i^iay  ^oods,  witliin  ten  days  after  purchase.  The  ])roc- 
iss  of  l)leachin^\  dyeing-,  and  finishing-  may  consume 
sixty  (hiys;  the  p.-ocess  of  (hstrihution  amon;^'  and  col- 
kciion  from  the  dry  <4()0(ls  wholesalers  who  purchase 
the  finished  ])roduet  will  re(|uirc  at  least  sixty  days  more. 
l"i;n(ls  loaned  a  borrower  of  this  (lescrii)tion  should  be 
automatically  returned  with  the  completion  of  the  trans- 
action.  Or  a  company  operatin<if  grain  elevators  in 
Minneapolis  ships  wheat  in  carload  lots  to  a  Philadel- 
phia grain  exporter,  asking  its  local  bank  to  discouii-t 
tlie  bill  of  lading  draft  created  by  the  transaction.  The 
completion  of  this  ])urchase  by  the  sale  of  the  sterling 
yrain  bill  automatically  returns  to  the  bank  the  money 
l)()rrowed.  From  the  standpoint  of  a  commercial  banker 
loans  of  this  character  constitute  the  ideal  bank  credit. 
Hanks  are  to  be  en\ied  when  a  large  part  of  their  funds 
are  utilized  by  local  dealers  engaged  in  })roducing, 
marketing,  and  distributing  the  great  staples  that  the 
people  consume,  as  food,  clothing,  heat,  and  light.  A 
liank  so  located  will  continue  its  usual  business  whether 
or  not  the.  _'  is  a  ])anic  on  Wall  Street,  whether  or  not 
tlic  financial  leaders  are  hurryiiig  to  Washington, 
whether  or  not  there  are  eager  buyers  for  life's  light 
luxuries. 

A  favorite  form  of  loans  of  this  sort  are  the  re-dis- 
lounts  of  other  banks,  especially  if  the  bornnving  banks 
■ire  located  in  sections  where  seasonal  borrowing  is  the 
usual  rule  and  are,  therefore,  themselves  seasonal  or 
temporary  borrowers.     The  risk  involved  is  small  and 


ii/= 


'»•% 


;5l,s 


M<»^|;^     AM)   1{.\\KI\(; 


Hi: 


I>';"nr,i.s  of  rr-.lis.-ont.ts  .•..•<■  .•,,,!  to  .rn.ain  on  cmlit 
"'fl'  "'^'  l»",l,no-  hank  in  n.nd,  lar.vr  proportion  than 
arc  the  proc-nls  of  or.hnary  loans.  A  hank  usualiv 
I'orrous  to  unrvnsv  its  rosc-r\es:  a  firm  usualiv  horrows 
to  pay  out  the  proceeds. 

rUv  ahovc-  mentioned  two  classes  are  considercl  most 
(ic'siraolc  loans:  the  two  f'ollouinu.  k,ss  dcsirahk'. 

'•m.   Capital  /nans.-- -'I  hinl,  .-apital  horroucrs.      This 
Pin-ase  is  inlendcl  to  <lescrihe  the  borrowing-  of  pc,-nn- 
'H'.it  capital  for  a  business  to  be  repaid  from  earnin-s 
or  profits  as  they  accum.date.  and  the  natural  results 
are  continuous  loans  aiul  over-tradin^r.      j.^r  instance: 
Ihe  president  of  a  manuf  acturin^r  corporation,  in  con- 
structing a  new   plant,   fin.ls  tfiat   its  cost  exceeds  the 
<'a],ital  subscribed  by  tl.e  stockiiolders.      He  borrows  the 
necessary  money  by  issuin-  notes  which  are  disouinted 
by  a  friendly  bank.     This  loan  can  be  extinouished  onlv 
by  borrowing'  elsewhere,  by  continuous  operation  at  ', 
j)roht,  or  by  the  sale  of  the  plant. 

J|!)r,.  Capita!  ,houhl  come  from  stock  and  hornJ  mv/r.v 
—  Ihe  Meakness  of  this  position  would  (,uickK  be  made 
manifest  should  manufacturing  operitions  cease  All 
eapably  manaoed  banks  discoura-e  such  loans  in  a,n 
substantial  measure  unless  conditions  are  uiiusuallv  i'l- 
vorable  for  continue.l  hioh  earnino.s  uhicli  can  I.;  an- 
pliul  to  reducing  steadily  such  a  loan  within  a  reasonable 
t.me.  (  apita!  for  re.iuirements  of  this  character  shoul.l 
be  j)rovided  by  additional  subscriptions  .,f  stockholders 
nr  by  sales  of  bond  issues.  That  is  to  sav,  ^he  funds 
■slunild  be  held  in  the  form  of  permanent  or  I-  n.r  Unu 
I'ornnvmo-  at  the  option  of  the  borrower  throui>iri>onds 
secured  b\-  mortuaiic. 

Thi:,  idea  is  eoi.e.sely  exprcsseti  by  the  advertisement 
ot  ;i  prominent  Chicago  bank:     "C\.nservativ,   bankln<^ 


Ujt 


LOANS  or  liu:  i?.\.\k 


11!) 


.oiisists  ill  caring'  for  many  iiitciTsts,  while  (•a])itali/iii^f 
iioiK'.'  Till'  statciiK'iit  of  a  sti'on<^ly  or^aiii/.rd  inaim- 
f;ictinMn<^'  corporation  or  firm  itidicatt's  <|uicl<Iy  cotivcrt- 
ililc  assets  ahmidaiitly  siitliciciit  to  j)rotec't  all  (|uic'k 
li;il)ilitit'S.  ()♦'  c'oiirsf.  from  the  staiulpoidt  of  the  maii- 
iir,i(tni-ei-  enju"a<4'e(l  in  a  highly  profitable  line  of  work, 
till  tciiiptatioii  is  allui'in<j'  to  endure  for  a  pe;-iod  the 
saerifices,  hnff'etin^s,  and  annoyances  of  earryin<4'  wlmt 
is  termed  a  plant  debt,  knowing-  that  he  w  ill  thereby  ])e 
enabled  to  maintain  ])ermanently  a  low  eapitali/ation 
and  tlnis  render  the  task  of  dividend  earning  li^-hter  for 
all  time  to  come  wlien  the  plant  debt  shall  once  have  been 
extinguished  out  of  earnin<;s. 

;}!)7.  Mort^ni^e  loans. — l-'oui-th,  lon<4-  time  or  perma- 
[icnt  borrowei-s  on  mort<>'a<^e.  To  this  class  ])el(;n^  the 
li.ildeis  of  improved  and  j)roducti\e  central  real  estate 
ill  till'  larger  cities.  Tiiou<4'h  these  loans  command  low 
rates  by  reason  of  the  stable  vahn  of  the  security,  na- 
ti  i[ial  banks  are  ])rohil)ited  from  takint*-  them  directly, 
except  to  secure  a  ilebt  pre\  iously  e\istin<i',  and  are 
ciiticised  severely  for  taking'  them  •ndir*'ctly.  These 
Idaiis  are  gencally  })laced  with  corporations  controlling 
trust  or  j)erniancnt  fujids,  scch  as  life  and  tire  insurance 
cMii,j)anies,  savings  banks,  and  trust  companies.  T'he 
ih  i4iee  to  w'licli  these  loans  are  encouraged  by  our  laws 
ami  the  case  Mith  which  money  can  be  borrowed  in  round 
amounts  u[)on  improved  central  rea'  estate  in  onr  larg-i 
cities,  ])ossibly  affect  the  advance  in  real  estate  \alues 
as  dii-ectly  as  the  iticrease  in  population  and  wealth. 
Uuildinu'  and  loan  associations  affoi'd  the  most  eifective 
]»lai»  for  handling  small  real  estate  loans.  In  this  elassi- 
ticatioii  ma\'  be  included,  for  some  reasons,  the  bomls 
constituting  preferred  liens  upon  high  class  railroad 
ami  traction  propci'ties.      l?ut  their  ready  coin  ertibiiit 


'320 


MONKY  AND  BANKING 


renders  tlicni  also 


ilL'C 


e{)tah|( 


ptahle  as  a  hank  invcstnicrjt.  and 
K-y  arc  tavo.yd  l,y  the  national  hankino-  svsten,  in  that 
t"^'  'lile  re^rardn.o-  ,xcrss  loans  is  not  applied  to  then. 

'm.   Loans   reported   (u   the  comptroller.     The   f„|- 
cnv.nn-  elass.fication  is  nse.l  hy  the  Comptroller  of  the 
Currency   n>.   the    reports    re,,uired   of   national   hanks 
Comparison    ,s   ma.le   with   the   statements   eovev' 
I)eiiod  of  tti,  vears: 


i-uii>-  a 


LOANS  OF  THE  HANK 


S21 


.'JIM).  Demand  loans  have  i»ctrast(L— The  first  class 
irpresents  the  demand  loans  of  all  the  national  banks. 
It  will  he  noted  that  these  unsecured  demand  loans  have 
increased  over  4.  per  cent  in  ten  years. 

The  second  class  are  demand  loans  secured  by  stocks 
and  bonds  as  collateral.     There  is  an  increase  projxjr- 
tionately  in  this  form  of  loans  between  1897  and  ]!)()<;. 
The  year  IJKXJ  was  one  of  great  speculation  in  the  stock 
markets,  and  the   increase   in   this   item  represents   the 
^n-owth   of   speculation   on    the   margins.     About   one- 
third  of  these  loans  a'-e  reported  by  the  New  ^^)rk  banks 
aioiie.      In  1897  these  loans  fell  oH"  proportionately  to 
others.   prob{iJ)ly  ,„i   account  of  the  hcjuidatinn  of' the 
stock  markets  which  had  taken  place  during  the  summer, 
the  margin  traders  having  l)cen  sold  out  and  their  stocks 
going  into  the  hands  of  holders  who  could  purcliasc 
then,  outrigh 

too.  Donhlr-namc  pa  per. —The  next  item  rei)resents 
trade  i)aper  discounted  at  the  banks.     The  decrease  of 
H  per  cent  in  ten  years  indicates  the  changing  naturt'  of 
l);ink    loans.     The    commercial    jjaper    |)laeed    through 
cninmercial   pa|Kr  houses,  which  are  di  scribed   later,   is 
single-name  paper.      It  is  now  the  custom  of  the  largest 
Ik'iiscs  not   to  take  notes   from  their  customers  but  to 
l'"in.w  on  their  own  credit.     This  tendency  is  more  ap- 
I'li-e-if    in   the   cities   than   in    the  coimtry   as   a    whole. 
I'linnighont  the  country  there  lias  luen  ;"ui  ab-.olutt   iti- 
erease  in  two-name  pap(>r  of  nearly   100  per  cent,  while 
"i«'  increase     n  this  class  of  loans  held   t,y    \cn-   York 
haiiks  has  !)•  ^n  not  more  than  .'JO  per  <-eti». 

••01.  Single-name  and  brokers'  paper.—  'Vhv  amount 
••'■  Mugh  -name  pap.r  lu  Id  by  tin   banks  almost  <!..,,!, I,.] 


li, 


le  commercial  |)ap(!-  houses. 


1'-.  iiHiK  .iting  UK  gr(i\s  (II  (i| 


L 


VII— .M 


ii 


322 


MONEY  AND  BANKINC 


in 


The  last  classification  represents  time  loans  on  mort- 
gages or  other  security.  Since  the  law  prohibits  the 
national  banks  from  loaiiing  on  mortgages  the  colJateral 
back  of  these  loans  is  probably  to  a  large  extent  personal 
securities  and  warehouse  receipts. 

Jielow  are  rej)ro(luce(l  two  forms  of  notes  in  use  geii- 
crallv  bv  banks: 


Jl'DGMENT  NOTE 


o 

< 


y. 


N 

< 


8 EVANSTOX,  Ti  I IS!)      I 

nfter  datr.  for  value  nc.iviil proiiiiso  to  j),iv 

to  thr  onirr  of  l!ic  SIWIK   HANK  Ol'   I':VA\.ST()\, 

I 

Doi  IMI'^. 

t 

;  Mt   the  STA'I-F-:  IVWK  OF   I'A  AXSTON,  with  interest  nt   the  rale 

of |)er  cent   [ler  aiiniiiii  from   inilil  paid. 

And   to   secure   the   |)aytiien     of   said    anioinit henliv 

iiuthori,^e   irrevo<'al)ly   any   attorney   of  any  (.'oiirl   of   record   to   aii- 

I'car  for in  --nch  {'ourt,  in  term  time  or  vacation,  at  any 

time   hercaftiT,   anil   lonfess   a  JMd^'ment    without    process   in    favor 
of  tlie  liohler  of  this  note,   for  such   anionnt   as  mav   appear   'o   In' 

Mliiiaid   thereon,  tom'lher   \y\\\\  costs   and    '.    dollar-    altor- 

ni'y's  fees,  and  to  waive  ;uid  releax-  all  errors  uhich  inav  .nterveiw  ; 
in  any  such  proeeedin^rs,  and  consent  to  iiinnediate  execntion  upon 

(such  judjrtnent ;  hereby  rat  ifyinj?  and  confinuinp  all  that   

said  attorney  mav  do  liy   virtue  h,i>   tl. 


No. 


r)iip 


(Ml. I.  \  rhU  \I.  NOTE 

% I'.V  \  VSTOS,     II  I 

ON   DFM ANI"),  i\^\fr  lintr  pr'imitv  to  pnj/  to  thf  order  nf  Ihi 

STATI,  HANK  <)!•   KNANSTON,  nl  >lt  n/fire. 

... Dot  I   *R', 

for   value   rerrired,   vith   inlirml    of    Ihv    rote   of    p,r   iml    fur 

nnnum.   nl'trr   dotp.   horynq    dfjiofitnl    irith    noid    fhink    o>   rnllnlrrol    nrriinlii 
for   thf  imymi-nl   'if   thm  orul  nriu  of/iT  Ivilnhtu   nr  linhilitii'n   t>f   Ibf   uuilfi 
Bxyned  to  mid  /{(ink    hi'rituf'.rr   or  hrreoftfr  ront lorl,  il ,   thf    folloiniKf   pyoji- 
trty,  riz. : 


thf  markft  ralu*  of  which  m  noir  f If  thf  Honk   or  its  attigni 


m 


: 


LOANS  OF  '^'HE  BANK 


aa;3 


■  I,  I'l  Ihiil  thai  niii<l  I  iilliihriil  .iii-iiri/i/  i.i  of  liss  value  tlrni  nborr  ntntfd.  rtr 
'n>i  if  fit'id  s(i-ur'ilii  .iltall  dirlinf  i;i  vnliir.  nr  the  liobilitii  of  the  uiider- 
M /(((>/  /')  siiiil  ISdiikx  III-  itn  <is.iliiii!<  flidll  be  lit  mil/  time  merenKed,  xaid  Ihiuk 
or  i/."  ii.isifiim  null/  rail  for  additional  .teriinti/  fatigfaetorq  to  the  Imldir 
luniif.  and  falhire  to  fnnii.ih  the  aanie  fhiill  make  this  note  at  once  due  and 
jHiiiahle.  Th(  undi  rsiani  d  hinbii  ijires  xaid  Hank,  its  attorneu  or  its 
afxiiins,  full  poirir  to  mil  snul  ndlalerat  or  aiii/  pari  thirinf,  vithnut  notire 
or  drniand.  at  fuiblir  or  jirirate  sale,  in  ease  said  riillateral  shall  be  found 
nf  less  value  than  idtore  stall  d.  or  in  ense  aiiii  of  said  rullateral  shall  decline 
ill  value,  or  in  easi  ndditinnal  secnrili/,  sat isfartoni  to  Ihr  holder  hereof,  shall 
nut  he  funiishid  upon  call  as  above  providid.  or  in  case  this  note  or  am/ 
olhir  liahilitii  of  the  undersiiim d  to  said  /lank  shall  not  be  paid  at  ma- 
tiirili/,  and  if  such  sale  shall  be  public  or  at  Broker's  Hoard,  the  holder 
heriiif  mail  piircha.fe  at  such  sale.  In  case  of  sm  h  sale  the  proceeds,  after 
puinnint  of  the  costs  and  i.rpiiisis  coiintctid  with  siud  cnllateral,  and  the 
sale  and  deliver;)  thereof  mail  be  ajiplied  upon  ami  liabilitii  of  the  tinder- 
tiiliifd  to  the  holder  hen  of.  irhetlier  due  or  not,  and  the  surplus,  if  ami.  shall 
be  paid  to  the  iindersifiiii  d .  Iiis  or  their  assiiins;  but  if  the  proceeds  of  such 
title  rhiill  not  paii  in  full  tin  liabihtiis  of  the  iindrrsnined  to  the  holder 
hrriiif.  the  balance  of  such  liabihtiis  shall  bimnie  at  once  due  and  paij- 
iible  and  biar  inlinst  ai  the  rale  of  si  n  n  jii  r  ciiit  pi  r  annum  from  the 
lime  of  such  sale.  In  case  of  ami  i  .nhaniir .  or  adililioii  to  the  collaliral 
iitiiive  ninnid.  the  provisions  hiriof  shall  i.rliiid  to  such  niw  or  additional 
ciilliiti  lal.  In  case  of  the  insolvinci/  nf  Ihr  iindi  rsiijned,  am/  indibti  dm  ss 
due  from  till  liiial  holder  hereof  to  the  undi  rsuini  d  mail  he  appropriated 
iiiiil  iipplii  d  liiriioi  at  ami  time,  as  in  II  bi  fore  as  after  maturitii  hereof. 

No '  ". 

Due 


KC_'.  J  lid  gillie  It  f  note-  In  the  jud/^ineiit  note  tiic 
si^iiitr  autliori/.t's  the  bank  tliroiit^ji  its  attonu  v  to  ap- 
pear in  any  court  and  ^tt  jiid^Micnt  in  the  amount  of 
the  noti'  without  the  trouhjc  and  i'\j)ens(.'  oC  pro\in^ 
ilic  (  xistencc  of  the  drht  or  ^ivinix  the  si^'^nei-  the  i-i<,^ht 
til  (1<  iVnd  iiiiiis(ir  a<>ainst  the  ,)ud^inent.  This  I'oriii  of 
iiiilc  enahles  the  hank  to  hecoir'e  a  pid/^iiient  ert^htor 
in  case  the  signer  is  threatined  with  insolvency  and  thus 
t(i  |)laee  itscll'  iji  a  jjrel'erred  position  in  collecting'  the 
.M.t. 

K>.'{.  Colldtrnil  iinlc.  '|'h(  coliatei'a!  note  is  the  ordi- 
n.iiy  noti  rei|uiri(i  of  hoi  rowers  who  pled/i^e  collateral 
to  SI  cure  the  debt.  It  will  he  noted  that  the  collateral 
deposited  secures  not  oidy  this  deht  hut  an\'  other  (h  ht 
that   the  si^iu  r  owes   to  Ihr   hank.      Tlu'  hank   has   the 


n^ht 


•till  i 


'11(11^     I   tl  I «       tl  I  M  I 


fnihue  to  deposit  such  collaleial  makes  the  note  due  at 


:«+ 


MONKY   AM)   BANKINC; 


i 

m 


once.  Tlie  bank  does  not  liavc  to  wait  until  the  matur- 
ity of  tlie  note  to  proeeed  a<rai»ist  the  debtor.  Further- 
more, if  additional  eollateral  is  not  fortlicoming  the 
bank  has  the  ri^lit  to  sell  the  collateral  at  public  or 
pri\ate  sale  and  is  evrn  permitted  to  ])uy  it  in  itself  if 
it  cares  to  do  so.  It  the  sale  of  the  collateral  should 
fail  to  cover  the  indebtedness  the  balance  is  still  an  obli- 
gation against  the  delator.  If  the  si^nier  should  become 
insolvent  the  bank  is  a  })referrcd  creditor  and  may  seize 
the  collateial. 

These  pn)\  isions,  which  seen  so  drastic,  are  necessarv 
in  order  that  the  bank  may  )rotect  itself  in  times  of 
falling  values.  The  l)anks  making  collateral  loans  usii 
allv  depend  almost  entirely  upon  the  collateral  and  very 
little  upon  the  /jjeneral  credit  of  the  borrower.  There 
have  been  numerous  cases.  j)"\\  l\  er.  t(^  show  that  a  bank 
is  not  always  safe  in  relyin;^'  u|)on  the  value  of  liie 
collateral.  Forced  securities  have  been  used  to  secun 
loans,  the  t'ori^ers  de])en(lin<;'  upon  the  carelessness  of 
the  bank  in  not  scr>itini/.in^'  the  secui'ities  as  carefully 
as  if  they  were  purchasing"  them. 

M)i.  A'/.s/.'  ///  colhitcrdl  h.  ins. —  A  few  years  a^o  a  new 
stock  ol'  the  Railway  K(|uipuient  Company  apj)eare(! 
on  the  cuib  market  in  New  ^'ork.  Heiuf^  jn  the  hands 
of  the  promoters  of  the  company  the  stock  was  easily 
l)id  up  to  a  very  hi^di  price  by  means  of  "wash  sales" 
that  is,  the  promoters  buying"  and  sellin<4'  the  stock 
an\on^'  themselves.  After  the  public  had  become  accus 
tomed  to  seeing-  the  (luolations  o!"  f!ie  stock  in  the  daiK 
ncws-papv'rs  ilie  j)rnmoters  wci  !  to  other  cities  an  : 
opened  deposit  accounts  with  the  banks.  IIa\  in^  estaii 
lished  their  credit  tluy  persuaded  the  banks  to  a'-cept  tin- 
stock  as  eollateral  with  a  liberal  margin.  When  the  eon 
federates  had  l)()rrowed  as  much  as  thev  could  the  bank- 


LOANS  or  Tin:  uank 


385 


iiatiir- 
irther- 
ig  the 
)lic  or 
self  if  ! 
should 
n  ohli- 

ICCOIIK' 

V  seize 


•  a  new 
j)eare(l 

hands 

easilv 
lies"  - 

stock 

aceus- 
V  daily 
:s  and 
;  estali- 

■|)t   tlll^    ;| 

lie  coii- 
'  bank^ 


S), 


were  one  day  surprised  and  chagrinetl  to  find  that  the 
piiee  of  the  stock  on  the  curb  market  had  fallen  to 
almost  nothing  and  that  the  collateral,  which  was  the 
(iidy  secui'ity  i'or  the  loan,  was  almost  worthless. 

'l"he  great  bulk  oi'  collateral  loans  in  Wall  Street  are 
call  or  demand  loans.  Wiien  the  lender,  usually  a  bank 
(ir  tiiist  company,  calls  the  loan  the  borrower  must  pay 
it  or  his  collateral  is  sold  to  satisfy  the  debt.  The  rates 
for  call  money  depend  upon  demand  and  suj)ply.  The 
yieatest  market  for  it  is  the  New  ^'ork  Stock  Kxchange 
where  it  is  offered  by  brokers  just  like  a  stock.  When 
it  is  plentiful,  call  rates  range  from  1  to  3  })er  cent, 
and  money  is  easy;  from  (J  to  8  j)er  cent  is  firm,  and  when 
it  soar  beyond  that  rate  money  is  stringent.  In  times 
of  ))anic  the  rate  has  gone  above  100  per  cent. 

lO.)  l\siiri/  lares. — Any  rate  of  interest  higher  than 
that  fixed  by  law  is  usurious.  I  low  then  can  New  \'ork 
hankers  and  money  brokers  charge  40  or  80  per  cent 
foi-  call  money? 

Hefore  explainijig  how  this  is  possible  let  us  see  just 
uliat  is  meant  by  the  legal  and  maximum  rates  of  inter- 
est as  fixed  by  statute  in  most  states.  There  is  a  very 
wide  misconception  of  what  is  meant  l)y  the  legal  rate. 
Contrary  to  the  usual  impression  it  is  not  always  the 
highest  rate  that  can  be  charged  for  borrowed  money. 
Instead,  it  is.  for  example,  the  rate  that  the  court  would 
iii,])ose  if  a  judgment  to  collect  an  account  "with  inter- 
(st"  wei'c  entered.  If  the  li  gal  rate  in  the  state  where 
'lie  judgiiirnt  was  entered  hap|)ene(l  to  be  <i  per  cent. 


Uie  drCcndani  would  lia\e  to  pay  0  p<  r  i-enl.  'I'lie  max- 
!uinin  legal  late  is  the  highest  rate  tlurt  cui  be  charged 
I'll  money,  a?id  any  rate  above  the  maximum  is  usury. 
In  some  states,  as  for  example  in  \ew  ^'ork  and 
I't  nnsylvania,  the  legal  and  maxnnum  rates  are  the  same 


*f' 


ii2(i 


-MONKY    AM)  1JANKI.\(; 


If  J 


~0  pw  cent;  in  Alaluinui  hotli  rates  are  8  per  cent; 
in  liiinois  the  le^ral  rate  is  .5  per  cent  and  the  niaximuin' 
rate  7  per  cent;  in   Kansas  (>  ptr  cent  and  10  j)er  cent 
^i|  respectively;  in  Indiana  (!  per  cent  is  the  legal  rate  and 

8  per  cent  the  niaxiniuin  rate. 

400.  Call  loans  (■.r<';///;/(y/.— Althongh  the  niaxiniuin 
rate  in  \e\v  \-(,rk  State  is  0  per  cent,  the  ^Vall  Street 
liankers  can  charge  any  rate  of  interest   lor  call  loans 
by  reason  ol'  a  sectir)n  of  the  state  hankino'  law  which 
says:     'Tpon  advances  of*  money  repayable  on  demand 
to  an  amount  lu-t  less  than  five  thousand  dollars  made 
ui)on  warehouse  rcceijits,  hills  of  ladino-,  certificates  of 
stock  or  dej)osit.  bonds  and  other  ne<>;otia')lc  instruments 
pledoed  as  collateral  seciirit>    for  such  repayment,  and 
any  bank  or  individual  banker  may  receive  or  contract 
to  receive  and  collect  as  compensation  for  making  such 
advance    ann    sum     to    he    a^iral     upon     in     writing 
l>y  the  parties  to  such  transactions."     Thus  the  banke'i- 
can  charge  any  late  for  call  money  for  sums  of  $.5,000 
and  moie  that  the  borrower  is  willing  to  pay.     With  a 
tmie  loan     a  loan  made  for  a  spccitied  period,  as  ninety 
(lays— the  rate  cannot  i)e  higher  than  the  maximum  rate. 
Most  people  beliexf  that  a  call  loan  is  for  one  or  two 
days  only.     Some  call  loans  run  forty  days  or  even  mori . 
The  interest  on  it  changes  with  th     tiuctuations  in  call 
money   rates;   the   interest  on  a  time   loan   remains  the 
same  during  the  life  of  the  loan. 

■KIT.  Loans  on  ojmi  'oook  accounts.  Soiuv  bankers 
loan  funds  to  business  men  on  the  security  of  open  book 
accounts  of  their  custonu  rs  or  on  insiaiiment  contracts. 
This  business  is  strongly  discounten.tnced  b\-  the  mon- 
conservative  banks.  Th.sc  classify  bankers  who  cML^a^v 
ni  it  with  pawnhrokers.  Hankers  who  do  this  business 
claim  that  it   is  exactly  the  same  as  ilie  old  business  ol 


LOANS  or  THE  BANK 


327 


discounting  trade  paper.  Tliev  argue  tliat  as  trade 
paper  is  now  no  longer  given  by  customers  to  the  same 
ixtent  as  formerly,  the  merchants  have  none  of  it  to  dis- 
count at  their  banks  and  therefore  it  is  permissible  for 
tiiini  to  borrow  on  the  funds  due  them  from  customers, 
although  these  are  not  in  the  form  of  notes.  Conserva- 
tive bankers  on  the  other  hand  say  that  utider  present 
conditions  of  banking  c()mi)etilion  any  !)usiness  man 
can  liorrow  on  his  general  en  it  all  the  bank  funds  he  is 
I  iititlcd  to  and  that  those  merchants  who  can  get  funds 
(iiily  by  hypothecating  and  assigning  tlieir  book  accounts 
aic  undeserving  of  any  bank  credit  at  all. 

408.  Providing  tcmporarij  capital. — The  financial 
manager  of  a  business  is  concerned  principally  with 
liiidging  over  the  interval  between  the  ])urchase  of  ma- 
tt rials,  etc.,  and  the  realization  of  the  value  of  the  out- 
put ol"  the  industry.  The  value  ol'  all  the  materials 
and  stock  represents  capital  wliich  must  be  contributed 
by  someone.  If  materials  can  In-  bought  on  credit,  the 
scllci-  is  the  one  who  has  provided  that  capital  for  a  short 
time,  tliough  he  may  shift  tjiis  burden  on  to  a  bank  by 
discounting  a  note  taken  in  payment  f(  '•  the  materials. 
The  l)uyer  of  the  materials  may  thus  jiartially  escape 
Wiv  burden  of  providing  temporary  capital.  On  the 
other  hand  his  own  customers — the  purchasers  of  liis 
linished  product — may  put  upon  him  the  necessity  of 
finnishing  caj)ital  to  them  by  demanding  terms  of  from 
thiily  days  to  six  months.  In  most  cases  the  business 
man  will  find  he  is  able  to  shift  less  of  a  burden  upon 
concerns  from  whom  he  buys  than  that  he  is  compelled 
to  bear  on  behalf  of  his  own  customers.  When  coUec- 
tloiic  ;ir!'  s](!w  tb.is  e\t!'a  burtieu  i<  corresi'on.ibnjrlv  ui- 
creased. 

The  task  of  the  financial  manager,  therefore,   is  to 


3i>8 


MONEY  AND  BANKING 


^^et  Ihrouul,  il,(.  assisfancc  of  banks  the  use  of  capital 
not  nmk'd  by  its  owners.  Banks  act  as  agents  between 
the  owners  and  the  nsers  of  capital.  They  are  always 
ready  to  furnish  capital  to  any  one,  provided  the  bor- 
rower can  oive  satisfactory  security  for  repayment. 
The  secin-ity  offered  to  a  bank  may  be  either  the  gen- 
eral credit  of  the  firm,  l)ased  ui)on  its  reputation  for 
prompt  payment:  the  possession  of  property  above  its 
liabihties:  or  the  maintenance  of  a  certain  deposit  balance 
at  the  bank,  Jn  case  these  are  not  sufficient,  cai)ital  may 
be  granted  on  cohateral — some  form  of  property  hy- 
pothecated to  the  bank. 


Hni 


IH 


CHAPTER  XXII 


LOANS  a(;ainst  (c)[. lateral 


400.  Collateral  for  hank  loans.~The  form  of  collat- 
eral most  easily  handled  is  no  doubt  stocks  and  bonds 
extensively  dealt  in  on  the  Stoek  Exchange  and  which 
are  marketable  on  a  moment's  notice.  Heal  estate  and 
other  forms  of  permanently  invested  cai)ital  are  bad 
eollateral  for  a  bank  because  of  the  difficulty  of  realizing 
ui)()n  them  quickly.  The  third  ^reat  class  of  property 
uhieli  may  be  used  for  collateral  is  merchandise  and  ma- 
terials representing  the  investment  of  that  form  of  cap- 
ital which  it  is  the  le^^-itimate  function  of  banks  to 
])n)vi(le.  If  the  calculations  of  the  owner  are  not  amiss, 
tills  pro])erty  will  be  j)repared  for  the  market  and  sold 
u  itliln  the  near  future,  so  that  it  embodies  the  l)est  (|ual- 
ily  in  a  collateral  security  in  that  it  will  be  licjuidated 
tiaturally  and  thus  provide  funds  with  which  to  repay 
the  debt. 

HO.  Merchandise  as  collateral. — The  difficulties  met 
with  in  tlie  use  of  this  most  natural  form  of  collateral 
lor  bank  loans  have  considerably  hindered  its  emj)loy- 
inent  as  such.  Merchandise  and  materials  cat  mot  be 
deHvered  to  the  l)ank  as  in  the  case  of  stocks  and  bonds, 
if  they  are  left  in  the  possession  of  the  borrower  they 
may  disappear,  or  substitution  may  be  made,  or  they 
may  deteriorate  through  ne<^iect.     'i'hese  risks  can  be 

u  third  i)arty,  who  acts  as  trustee  for  all  concerned  and 

3Jiy 


iiSO 


MONKV    ANJ)  HANKING 


wlio   is   re<,uiml   by   law   to  ccni'orni   to   certain   rule 
whidi  make  fraud  and  loss  inipcssihle. 

411.  Advantages  of  good  xairrh,,i<s},tg  krus.—M  „ 
to  the  interest  of  both  tlie  banks  a.u^.  tiie  borrowers  that 
the   warehousing^  system   should   be   so  re^mlated   that 
loans  can  be  neootiated  on  warehoused  merchandise  as 
easily  and  safely  as  possible.     In  a  ^n-eat  number  o; 
cases  of  financial  difficulty  on  the  i)art  of  merchants 
or  manufacturers,  the  source  of  the  trouble  lies  in    'e 
investment  of  too  niuch  capital  in  merchandise  or  n,a- 
terials  which  cannot  be  sold  (juickly  without  loss  because 
of  adverse  market  conditions.     The  ^oods  bu\e  value 
but  time  is   lecjuired  to  realize  upon   it.     T?ankruptcy 
may  be  imminent  unless  the  banks  consent  to  pn>vi(le 
the  temporary  capital  to  carry  the    merchandise,   and 
their  doinu-  so  may  depend  upon  the  ri^k  invohed  in 
loanin..-  upon   the   security   of   the   U'e-chandise.      The 
value  of  a  warehousing  system,  regulated   by  law,  is 
measured  by  its  service  in  eliminating  the  risi    attend- 
ant upon  loans  on  merchandise. 

412.  Loans  on  merchandise  a  legitimate  function  of 
banks.— The  character  of  baid^  loans  has  changed 
greatly  in  recent  years.  There  has  been  a  marked  de- 
cline in  the  amount  of  trade  paper  offered  for  discount 
and  competition  among  banks  has  compelled  them  to 
develop  new  fields. 

The  collateral  loan  is  one  of  these,  but  few  banks 
have  been  willing  to  acce])t  anything  e\cej)t  stocks  and 
bonds  as  collateral  -loaning  on  merchandise  is  still 
regarded  in  many  (juarters  as  a  sj)tx^^ies  of  pawnbrokin- 
and  is  classed  with  loaning  o!i  book  accounts.  Xever- 
theless   loans  on   niercjuuidise  confor??!   »ii.-.!v 


.,.4-1,. 


*t; 


--.    —    ...,    .>...»„»i,     i,». 

banking   principles,   and    they   promote   the    industrial 
prosperity  of  the  community  more  than  any  other  class 


LOANS   ACiAINST  CULLATKRAL 


S6l 


(if  loans  in  that  they  give  snhstantial  aid  to  le<^itiniate 
(dinintrfu  in  niari^etab'  goods,  which  is  the  basis  of 
all  l)iisiness.  Anytlung  which  removes  obstruction  from 
the  free  passage  of  goods  through  all  tlie  processes 
tVoni  raw  material  until  they  reach  the  consunier  rep- 
II  sents  an  economic  gain.  All  other  business,  of  what- 
t\er  kind,  is  merely  auxiliary  to  this  fimdamental 
i.idductive  acti\itv.  There  is  no  doubt  that  the  inmie- 
(li.itc  future  will  see  a  gradual  elimination  of  the  uncer- 
tairitits  and  risks  incident  to  loans  on  merchandise  and 
a  (Irvtlopment  of  tiiis  branch  of  banking. 

41.'J.  Statement  iif  a  bank  president.— On  this  subject 
^i^.  \;ish.  former  president  of  the  Coi'ii  Kxchange 
i?;iiik  of  New  \'ork.  spoke  as  follows  at  it.^  liftieth  an- 
niversary baiujuet: 

The  hank  1ki>,  however,  made  two  iinportnnt  contributions  to 
A'  ■  ric:ui  hankiiiii'.  Prrsidont  Dunham.  Ijciny;  familiar  with  the 
^ram  huslness,  introdu'((K  inmiediatilv  on  takini^-  otficc,  tlie  un- 
usual ])racti('e  among  ijanks  of  :  sisting  merchants  to  carry 
larg('  stocks  of  grain  and  iuerchaniiise  in  this  port,  by  making 
I(ian^  on  that  i  lass  <)(  collateral  wlien  represented  hy  the  ware- 
)iiiu>e  reci'ipts  or  bills  f  latling.  It  subjected  us  at  the  start 
ti)  till'  stigma  of  being  a  jiawnbroker's  shop,  and  this  stigma 
"  -  fi'i'elv  ap})lied.  But  eventually  the  principle  of  advances 
I  ■!  Mil  I'chandise  «as  adopted  by  other  banks,  luitii  now  it  is  well- 
iilyh  universal.  It  has  always  been  a  distinctive  jjart  of  our 
huMuess.  Mr.  Dun'.iam  used  to  say  that  wheat  and  cotton,  wool 
.•uid  pork,  lard  and  coffee  were  as  good  as  gold,  and  he  was 
rcadv  to  give  gold  to  tlu  man  who  was  willing  tn  pledge  these 
( iiiiiiiiodities  as  security  for  its  payment.  He,  howt  .  rr,  con- 
tiind  his  opcrati-  ns  to  the  great  staples  named,  because  the 
'jiiihtv  aiui  the  price  were  less  subject  to  wide  variations,  and 
UHS  chary  of  general  merchandise,  where  the  differences  are 
much  more  marki'd,  and  to  a  non-dealer  somewhat  deceptive. 
'J'his  preferenie  for  the  staples  has  not  prevented  us  from  going 


;5:i;^ 


MONEY   AM)   IJANKINC; 


%mi'^ 


■f<!" 


iiiio  liss  (li'sira!  '  llruN  of  l)usii]oss,  wIk-iv  tlu'  soliditv  of  the 
born.wcr  has  onf'.  Awd  the  dNadvatitu^L's  of  his  collatLral,  and 
varifcJ  mid  sonut::  ;niius;tij.r  lists  of  iiicrchuiidise  have  been  re- 
porti'd  to  our  (hrti'toi>  i\,v  their  aj  prova! 

41  J..  J. ate  of  rcarrhouNf  rtccipff.—Tht  ^reat  ]imit;i 
tion  to  the  use  of  nierclmndise  as  collateral  is  not  so  miu  ii 
in  stability  of  \alues  of  the  commodities  as  it  is  the  diHi- 
culty  of  maintaining-  intacL  and  secure  the  collateral 
itself.  The  -levelopment  of  wareliousino'  and  the  use 
of  the  v.arehouse  receipt  under  such  leoal  reoulution  as 
to  ^-uard  a-^-ainst  fraud  is  gradually  diminishing  the 
risk  of  merchandise  loans. 

•il5.   l\iif\,rm  hnc. — A  valuable  contribution  to  this 
end  has  been  the  drafting  of  an  "Act  to  make  uniform 
the  law  of  warehouse  receipts"  l>y  Uie  Commission  on 
Uniform  State  Laws  in  lOOO.     'J^he  success  of  the  Com- 
mission in  getting  its  uniform  law  ol"  negotiable  instru- 
ments adopted  in  twenty-eight  states  and  by  the  federal 
government  makes  it  more  than   likely   that   this  ju-w 
act  will  soon  become  a  law  in  all  the  states.     As  in  the 
law  of  negotiable   instruments,   the  wai-eliouse   recei])t 
law  aims  to   codify   existing  laws   as    far  as   itossible. 
Whenever  anything  new  is  projjosed,  it  will  invariably 
be  found  a  step  in  the  direction  of  promoting  the  busi- 
ness of  loaning  on  merchandise.     The  passage  of  such 
a  law  in  states  which  have  not  already  a  similar  one  is 
of  the  most  vital  inie'cst  to  merchants  and  manufac- 
turers as  well  as  Itank'rs.      It  will  jiasten  the  time  when 
loans  will  be  made  as  readily  on  warehouse  receij)ts  for 
stored  goods  as  they  are  now  made  on  stocks  and  bonds. 
The  advantage  of  the   warehouse  recei})t   is   that   it 

..  ....1.1.  jLI -    1    .       1  ■'  '      ■  •  •      •  • 

c::.i:;ir:-    i;;;;    ^UOliS    liesci"!  iii.  i.i    iTi    il    It'    i>c   isoiti    or    pie{ig'e(i 

for  u  loan  uf  inoiiey  by  the  mere  delivery  of  the  ware- 


* 


Loans  a(,ai\m  i  ollaikhai, 


333 


I 


Iioiisc  rccci])t,  tl)iis  avoitliiio-  the  iiifoiiveiiiciR'c  of  an 
ncliial  innoval  or  delivery  of  the  property  itself.  In 
(itlier  woids,  the  warehouse  receipt  is  u  sytnhol  for  the 
pinptrty  (k'scrihed,  and  the  dehvcry  of  the  receipt  is  in 
l.iw  a  deli''     v  of  the  j)ossess!on  of  the  propei'ty. 

11<>  Hinli  involved  iit  loans  oh  xitirclionsc  rcfcipls. — 
'fi.c  danger  of  accepting  a  warehouse  receipt  as  colhit- 
I  r;d  may  arise  from  an  insutlicleut  or  false  «lescription 
if  the  ])roj)erty,  tlie  uufaithluhiess  of  the  warehouse- 
man, who  may  misapproj)iMate  the  property  coiDmitted 
to  his  keepinjL^;  ne<i:H<,''enee  in  earing  for  it;  or  from 
cai'clessness  in  allowing-  recei])ts  to  cireulale 'wlun  the 
[iroperty  hehind  them  may  not  exi.'.t  oi-  may  f)e  suh/ject 
to  liens,  hi  all  these  ca^es  the  Iioldcr  of  the  receipt 
iiii,L>ht  lose  his  claim  to  the  pi-oj)ei'ty  ,'Uid  would  he  forced 
!'i  rely  upon  the  personal  responsihility  of  the  war.'- 
Iiousema?!  for  re!ml)ursement  of  liis  loss. 

417.  Under  tJie  present  laxc. — I'ndcr  the  ju'cscnt  law 
ill  most  states  rhe  svarehouseman  is  responsihie  as  hailee 
\'<n-  the  safekeeping'  of  the  <foods.  lie  is  houiid  to  use 
oi'dinary  diligence  or  sue!)  care  as  ))rudent  j)ersons  usu- 
ally take  of  their  projierty.  He  is  not  hahle  for  losses 
causel  hy  Hre,  flood,  insurrectioii,  or  ])uhlic  c'cmies. 
1 1'  he  is  guilty  of  no  neglect  he  is  not  resj)onsil)le  for 
U'oods  stolen  even  hy  liis  own  en)])loyes. 

Persons  dejxisiting  me?-ehandise  with  a  \\arehoiise- 
inan  ai'c  o))li^ed  to  tnist  to  his  fidelity  and  dili^-enc'^'  in 
takiu'X  due  care  of  th.eir  property,  and  persons  dealing 
in  warehouse  receipts  are  in  the  same  position,  and  must 
also  trust  to  the  accuracy  of  the  warehouseman  in  de- 
scrihiti'T  in  the  receijtt  the  ])roj)erty   intrusted  to  him. 


!f     tlw>    ti-'i  r^>n)  >i !  ^i -t  I  Ml  II     mien  f»t^»-/^TM'i'i  4  II 



tails  to  take  due  care  of  it  or  if  he  falsely  or  insurticicntly 


•Mi 


.MONEY  AM)  HANKING 


I 


fc 


describes  it  in  the  receipt,  the  holder  of  the 


receipt  nu 


lose  his  chiiiii  to  the  property  and  mav  have  only 


i\ 


an 


action  for  (hima'j-es  aiji'ainst  tl 


le  w  arehouseni 


418.  /.v,s'//r  of  receipts  safi  guarded  ~ 


propose  1 1 

act  dn-ows  definite  restrictions  aronnd  issuin^r  of 

receijits,  and  makes  the  warehouseman  cni,.inally  hal)lc 
HI  many  -.ases.      It  provides  tliat  all  liens  on  the  goods 
must  he  set  forth  in  tlic  receipt,  inchidinn-  the  rate  of 
storage   charges.     Tiie   warehouseman   may   not    insert 
any  clause  absolving  himself  from  his  legal  liability  lor 
due  care.     -i)uplicate  and  non-tiegotiable  receipts  must 
be  i)lainly  markec'  as  such.     'J'he   warehouseman  shall 
be  obliged  to  del.ver  the  goods  on   the   receipt   if  the 
demand  is  acco?>;panied  by  an  otfer  to  satisfy  the  ware- 
liouseman's    lien,   a   surrender  of   the    receipt,   and   an 
ackno.vledgment  of  delivery.     The  warehouseman  shall 
be  justified  in  delivering  the  goods  to  any  one  tendering 
the  receipt    iiroperly  endorsed.      If  a  thief  presented  a 
negoti;ib|r  receii)t  properly  endorsed  the  warehouseman 
would  be  proU'cted  if  he  delivered  the  goods  innocently. 
41!).  ProUctian  U,  holders  of  rceeijds.      If  the  ware- 
houseman shall  fail  to  take  uf)  and  cancel  a  negotiabit 
recei|)t  when  goods  are  delivered,  he  shall  be  liable   lor 
fadure  lo  deli\cr  the  goods  to  any  one  who  j>urch;is(s 
for  value  in  good  faith  such  receipt,  whether  such  pur- 
chaser ac(iuire(l   title  to  the  receij)t    before  or  after  the 
delivery  of  the  goods  by  Ibis  warclioiisrman. 

A  warehouseman  shall  be  liable  to  the  boldrr  of  a 
receipt  for  damages  caused  by  (Ik  non-exislcncf  of  flu 
goods  (V  l)y  till,  failure  of  tlir  g,,o.ls  to  correspond  to 
the  description  there.. f  ;!i  the  rcc.  ipl  at  the  tune  of  its 
issue.  If,  however,  the  goods  aie  descrilu'd  in  a  reci.pt 
merely  by  a  statement  that  th(_\-  are  said  to  br  goods  of 
a  ccrluin  kind,  or  that  packages  containing  the  gooJs 


LOANS  AGAINST  C"OLI,ATERAL 


33.^ 


;ire  said  to  contain  goods  of  a  cei'tain  kind,  or  by  words 
of  like  import,  sucli  statements,  if  trne.  shall  not  make 
]ial)le  the  warehouseman  issuing  the  receipt,  although 
[lie  goods  are  not  of  the  kind  whicii  the  marks  or  labels 
ujxrn  them  indicate,  or  of  the  kind  they  were  said  to  1)0 
hy  the  depositor.  This  makes  the  warehouseman  liable 
for  what  he  asserts  only. 

4'J().  Gnnmhmcnt  not  allmccd. — (ioods  delivered  to 
a  warehouseman  who  issues  a  negotiable  receipt  there- 
for cannot  thereafter,  while  in  prvssession  of  t!ie  ware- 
houseman, he  attached  l)y  garnishment  or  otherwise,  or 
he  levi(  tl  ui)on  iindcr  an  execution,  unless  the  receipt  be 
first  surrendered  to  the  warehouseman  or  its  negotiation 
iiijoined.  In  most  states  the  })resen'i  laws  disallow  any 
!4a!tiishment ;  it  was  thought  best  i!i  this  act  not  to  taivc 
s(i  extreme  a  positi(..i  but  to  cover  the  essential  practical 
point  by  making  it  a  condition  ol'  the  validity  of  sueh 
MT/iu'c  that  th<-  negotiation  of  the  receijjt  be  enjoined 
or  the  document  impounded. 

A  |)e'-son  to  whom  a  negotial>le  receipt  lias  been  jiego- 
tiated  accjuires,  accoi'ding  to  the  act,  such  title  to  the 
goods  as  the  person  negotiating  it  had.  and  also  the 
direct  obligation  of  the  warehouseman  to  hold  |)ossession 
of  \iie  goods  for  him  according  to  the  terms  oj'  the  receipt 
;is  fidly  as  if  the  warehousiiuan  had  eontracted  directly 
with  him. 

t-L'l.  rciiaUi/  for  iUcf^nl  use  of  rC(rij)ts.—  l\  shall  be 
a  cnmirtal  offense  for  a  warehouseman  to  issue  a  receipt 
for  goods  not  actually  received,  or  to  issue  a  receipt 
knowing  that  it  corrtains  a  false  stateiudit.  or  to  issu'- 
iliiplicate  receipts  not  so  marked,  or  to  issue  a  rcceij)t 
for  goods  of  which  hi  himsi  !f  is  the  ownir  without  stat  ■ 
iiig  that  fact,  or  to  dclivei-  goods  without  canceling 
the  receipt.     ^\ny  pi  rson  who  deposits  g(H)ds  to  \shich 


;5;j() 


MONEY  AND  BANKING 


he  has  no  title,  or  upon  which  there  is  a  lien  or  mort- 
gage, and  takes  a  negotiahle  receipt  therefor  witli  intent 
to  deceive  without  (Hsclosing  want  of  title,  shall  be  guUty 
of  a  crime. 

Loans  may  he  made  on  receipts  under  such  a  law  wi^h 
little  risk  or  incoinenience  to  the  lender.  If  the  goods 
are  insured  his  chances  of  loss  are  practically  limited  to 
deterioration  in  the  (juality  or  value  of  the  goods.  Sea- 
sonai)le  goods  in  old  storage,  such  as  fruit,  butter,  eggs, 
poultry,  etc.,  must  l)e  sold  at  certain  seasons,  lest  they 
shrink  in  value  by  having  to  compete  in  the  market  witli 
fresh  goods  at  cheaper  prices. 

422.  T rails fcr  of  iitir  to  lender. — ^lany  banks  preier 
not  to  accept  recei])ts  for  warehoused  goods  as  collateral 
at  all  but  retjuire  the  transfer  on  the  books  of  the  ware- 
house to  themselves,  takhig  a  non-negotiable  receipt 
therefor. 


lit' 


CIIAPTKK  XXIII 


CREDIT  DKPART.MKNT  OF  A  BANK 

!••-'*{.  Evolution  of  the  credit  depart  went. — Only 
witliiii  recent  years  have  credit  departnients  appeared  in 
!lie  banks.  Formerly  the  cashier  was  snpposed  to  keep 
[Hrsonally  all  the  credit  information.  However,  it  has 
ludi  found  [)referal)le  l)y  the  banks  to  em|)loy  a  comi)e- 
t'  lit  credit  man,  whose  sole  business  is  to  accumulate 
iiifiirmation  on  credits.  In  some  of  the  lar^i^er  city 
I'.inks  and  es))ecially  in  the  offices  of  a  commercial  paj)er 
liniise,  there  are  highly  or^^anized  systematic  credit  l>u- 
rciiis.  which  have  on  file  every  bit  of  information  rei-ard- 
iii-i'  the  credit  standin<r  of  their  customers. 

Vl\.  Sources  of  credit  information. — The  cliief  source 
of  information  on  credits  is  of  course  the  statements  of 
the  customers  themselves.  Tntil  within  the  last  ^<.w 
\(  ais  it  was  not  the  custom  of  the  banks  to  demand  writ- 
tdi  statements  from  customers  and  there  are  still  busiticss 
JiKii  who  resent  the  re(|uest  of  l)anks  for  statements. 
As  a  rule,  howe^er,  the  borrowers  have  found  it  to  their 
;i(l\anta^e  to  vnake  a  full  statement  of  their  afairs  to 
tliiir  banker,  knowing-  that  failure  to  make  .such  a  state- 
lihnt  will  prejudice  their  credit. 

A  stan(;ard  form  of  customers'  statement  in  use  l)y 
i'links  is  rtproduci'd  below  for  the  |)urpose  of  showin^r 
till  items  (  !'  information  which  the  banks  believe  to  be 
important  m  the  n.initinn  ,,f  Joans.  In  some  doubtful 
cases  tlu  banks  may  riipiire  the  statement  to  be  certified 
l)y  a  professional  ai'countaiif. 


H: 


if 


\  11     ii 


887 


;}3S 


MONEY  AM)  BANKINC; 


!< 


If  ■ 


rnrm   A. 

STANDARD     FORM     OF     STATF.MFNT     FOR     FIRMS     AS     ADOPTED    BY     SF.W 
YORK    STATF.    HANKKRS    ASSOCIATION. 

FROM      

ADDRESS    

TO 

For   the   purpose   of   procuring    credit    from    time    to   time   with   you    for  "iir  n#un- 
tiiible    paper   or   otherwise,    we    furnish    the    folIowinR    as    a    true   and   accu;  ite   statf 

inent    uf   our   tinamial   condition    on     I'.IO,  ,,    which    you    are   to    consider 

:m    cnntinuin^    to    lie    full    a'  d    accurate    until    we    pive    you    written    n'tticf    of   chafigf. 


ASSETS. 

I.IABIl.ITIES. 

Tiisli  on  hand 

Cash    in    the    followinB    hanks 

Notes    Payable    Kiv.n    f.ir   iner 
chandise 

Notes     Payable     lo  .    *iatcd    to 

own   banks 
iNotes    Payable    othcrwis.'    dis- 
posed  of 

Acconnia    Pay.ible 

Deposits    of     Mr.ney    with     Fs 
as    follows 
By $ 

• 

.  •          1  •            :  • 



K'olos      Rec-n-ahle      of      cnsto 
mers    (not    transferred) 

Aci'ouDtB   Keceivable   of  c\islo 
mers    (not    Iransferrnd) 

Niites    and    Accounts    Receiva- 

.. 

■   ■ 

ble   o'   partners    (not   trans 

ferred) 
Merchandise       finished       (how 

valued        ^ 

Merchandise    unfinished     (how 

valiicil     ) 

Merrlianilise        raw        material 

By t    

By $    

By   sundry   persons  $ 

::: 

( how     valued                               ) 
Land     owned     liy     firm,     used 

for    this    business 
BuildiiicK      owned      by      firm, 

used    for    this    business 
Macliinerj      owned      by      firm, 

used    for    this    business 

Mortcage     Debt          

Chattel   Mortgages      

lotal    Liabilities 
Net    Worth    

— 

— 

- 

--- 

— 

TOTAL 

" 

TOTAL 

i 

CONTINGENT  LIABILITY:    Notes  Kereivable  of  customers  Disoounted 

or   Sold   and    not    inrhided   in   assets   enu- 
merated above 

Other   conIini;ent    liability     

We  Have  Not  Pledged  or  Assigned  any  .if  the  abov  Accounts  Receiva- 
ble our  .\^--i>,ned  Accninls  Receivable 
nni'-iint    \n 

(llliiT  assets  nsid   as   collateral    . 
I.NSI'RANCF:    on    merchandise    $  buildings       .        .1  machin 

iTv    $ Total    Ihsiiranct 

HISINKSS   and    RESULTS:     Annual    Sales    (nr    the    year    ended... 

190.    or     from 190      to Hin    . 

(.r  '=^s    Prcitils    on    Sales  For   the    same   p.riod 

K.x|ii  use     of    Conducting    Business  

Nfi    Profit  "      '[         '■  ][ 

Other   Inc. .me.    including  investments 

!«'.  n.liined    I'r.ifil  

WITHDRAW  .\1.S    bv    1   '.HTNERS    in.it    included   in   expense  of  conduct 

ing     business)      fr.m  1  !»0  .  .  to 190.. 

HAD    DFKTS    f..r    the    pern.d    fr.im  I'.XI      to 190    . 

SI'K'IAI.    t'API'l'AI,      contribuleil    bv  until 190., 

.       190. . 

190.  . 

PEN  ERA  I,    PARTNERS;     name  Ontside    Net    W  irth 


II) 


(  HKDIT  DKI'Airr.MKNT  OF  A  BANK 


;3;jy 


I 


V    ACCorNTS:    nli.Tr    kept    oilur    lliaii    abcive    

.  iHTGAUKS;   ou  what  as&ils  a  lion    

Avcrnso  TKKMS  on  whicli  we   SKMj    

Arerage  TKK.MS  on  wliic-li  we   ISUV    

HATK  of   ORGANIZATION'   and   KXIMKATION   cif   I'AKTXKHSHIp    '.'.'..['. 

TIMK    "f    YKAR    wlicn    Notes    ami    Ai-roiinls    Hcipival.I.-    <>i    i-iistoiiiers,     ['iiroIN-rtpd, 

are    jjeiierally    maxinnini     iniiiiniiiin 

TIME   OF    YEAK    when    Stocks    of    Morrlinndise    on    hand    aro    cpui'rally    ir.aximuin 

mininunn     

TIME  of  YKAR  when   Liabilities   are   maximum    luinimum 

STATKMKNT:    is   it    based    on    artual    inventory.' if   so,    Date 

VKKll'ITATlON:    have    the    bonks    been    audited    by    a    Certilied    Public-    Acer.untaiit  ? 

if   so,    Name   and    Date   of    Audit 


lU'SINES.S:   what    kind  of  business  do   you  ronduet  ! 
BOOKS:   wliat    kind   of  books  do   you   k. cp?    


(Please    si:.'n    fiini    name) 

^Mte   Signed.  ...         1  !io ,  ,  Ry 

Please  Give  PaMieuIars  of   Ivnh   Parrel  of  Real   Ksiale 


I>esrription 

Street    and 
number 

City    or    town 
and   state 

Title  in 
name  of 

Estimated 
value 

Mort- 
gages 

Equity 

■ 

'I'lic  l;i\v  is  .still  !iiK'(.itai(i  toward  jxi'soiis  wlio  make 

!  iNc  statoiiR'iits  for  the  purpose  of  ^aiiiiii^  civdit.      The 

"tniioiis  failure  of  A.  Hootli  and  Company  of  C"liiea^»'o 

ill  I '••OH  iiidiieed  the  legislature  of  Illinois  to  pass  a  law 

!i   \'M)\)  making  it  a  eriininal  offense  to  obtain   loans 

M   false  or  misleading-  statements.     TIh'    jutialty   for 

i'Mntrsois  tint    ind  impiisonmei.t. 

I"_'.5.  Credit  <'/^'Y7/(  /(  v.     'I'he  second  .souire  of  informa- 

m  is  the  credit  a<4-encies.      The  chief  credit  a^^'-eneies  in 

tliis  country  are  Dun's  and   Hradstret fs.     Concerning'' 

tli<    function   of   'hese   a<4i'ncies   one   hanker  has   said: 

'  \n\   man  is  unwise  to  base  a  '^.'A)  credit  soklv  on  an 


mo 


.M()m:y  and  banking 


I! 


If 


agency  rating  or  ivport,  ])nt  any  man,  business  house 
or  institutio;i  is  (loul)ly  unwise  who  cannot  get  hack  in 
full  all  that  he  i)ays  out  to  the  conmiercial  agency,  pro- 
vided lie  knows  lunv  to  use  the  information  which  he 
receives.  " 

The  fact  that  the  agencies  charge  the  same  fee  for 
reporting  upon  a  credit  involving  .$o{),()()0  as  they  do 
upon  a  credit  involving  oidy  $.5,  makes  it  impossible  for 
them  to  do  n)ore  than  superficial  work.  The  reports 
are  obtained  by  reporters  who  are  not  expert  credit  men, 
and  wlu.  are  reijuired  furthei-more  tf)  report  upon  ten  to 
fifty  concerns  in  one  day.  The  reporter  will  first  try  to 
get  a  statement  iVom  tlie  concern  under  investigation, 
and  then  will  go  to  the  banker  or  local  lawyer  for  infor- 
mation. The  n)a\iinmii  salary  of  the  bulk  of  such  ro- 
j)orters  is  not  much  abo\e  '$20  per  week.  The  business 
is  very  [)rofitable,  in  the  case  of  Hradstreet's  paying  a 
])rofit  of  (i<  ■_.  per  cent  on  its  capital  of  if^l. .)()(),()()().  Tiic 
charge  for  the  service  of  an  agency  is  ^MH)  a  year.  This 
sum  entitles  the  subsei'ibcr  to  100  special  reports  and  a 
book  of  j'atings  semi-annually.  The  reports  are  valu- 
able in  suggesting  points  which  might  otherwise  be  over- 
looked and  in  tabuhiting  information  obtained  in  other 
ways. 

4'2(!.  Duties  of  credit  num. — It  is  the  business  of  the 
credit  man  to  cndtivate  exery  possible  source  td'  inforin;i- 
tion  bearing  on  credits.  He  must  consult  court  records 
to  find  suits  which  ha\e  been  filed  or  judgments  ren- 
dered, lie  must  know  when  any  of  iiis  cHents  have 
P'corded  mortgages.  lie  should  find  out  the  business 
alhhation  of  bis  clients  so  :is  to  get  clues  as  to  the  kind 
of  business  done  by  them. 

The  credit  dej):irtm(td  of  a  I);uik  affords  the  best  op- 
porMmiiy  of  any  de|);n-tmt nt   tor  the  young  man  who 


m 


CREDIT  DKrAKT.MKNT  OF  A   IJANK 


541 


I 


wishes  to  learn  tlic  baiikinir  business.  The  experienee 
())'  iiettin<»'  information  about  the  business  men  of  the 
cniiiiiiunity  and  abc^ut  the  peeuhar  eonditions  existing 
iii  the  various  hues  of  trade,  will  eultivate  in  him  the 
jMiwxr  of  ju(l<rment  so  that  by  actual  })raetiee  in  the 
sulinrdinate  position  he  may  (jualify  himself  for  the  desk 
(>r  an  officer.  This  can  scarcely  be  said  of  any  other 
Mil';.rdinate  position  in  a  bank. 

{••-'T.  Tltc  commercial  notc-hrohcr. — The  note-broker 
is  a  middle-man  betwcn  the  lending  bank  and  the  bor- 
iiiwing  business  man.  His  profession  is  to  borrow 
iiKitiey  for  other  people,  and  the  need  for  his  services 
;iii(l  the  amount  ol'  his  remuneration  will  depend  upon 
his  skill  in  i)lacing  loans  and  in  obtaining  favorable 
Iniiis  from  the  lenders.  To  borrow  money  to  the 
best  advantage  is  an  art  recpiiring  exj)ert  knowledge 
;iii(l  ability  beyond  that  of  the  average  business  mana- 
ger, and  if  his  borrowings  ai'e  large  enough  to  make 
it  worth  while  it  is  ])rotital)le  for  him  to  engage  tiie 
services  of  the  note-l)roker  in  this  business. 

Tlic  business  of  note-broking  has  changed  radically 
within  the  last  decade  and  is  still  in  the  process  of  raj)id 
lit  \el(;pment.  The  old-fashioned  broker  was  simply  an 
;ii4rnt  who.  for  a  certain  commission,  placed  the  promis- 
soiy  notes  of  Jiis  principal  at  the  lowest  rate  of  discount 
ht  cituld  obtain.  lie  incurred  no  liability,  had  no  occa- 
sion to  employ  capital  of  iiis  own,  and  did  not  attempt 
III  place  the  jjaper  far  from  the  locality  of  its  inception. 

I-'JH.  Clian^c  in  the  business. — The  note-bnjker  on 
iniiimission  !;as  givcji  place  to  the  dealer  in  comnjercial 
paper  who  Iniys  and  sells  outright  the  jjromissory  notes 
of  his  clients.  The  !)usiiRss  is  practically  controlled 
by  seven  or  ei  lit  large  lu'ms  whose  operatiorcs  extend 
over  a  large  part  of  the  w  hole  ctninlr} .     The  nature  of 


.'5  ki 


:\I0M:V    AM)   HANKING 


li- 


pi': 


tl 


le  business  is  sudi  that  the  tejukiu/y  toward  central 
tion  in  a  few  sti'on^-  hand 
disad 


iza- 


s  is  inevitable  beeanse  of  tht 


disadvantages    under    which    the    sni 


dl    operator    must 


)() 


r.      Larne    caj)itaK    the    eonfidc-nee    of    lend 


ers. 


hd 

thoroun-hnoinn-  and  elHcient  credit  department  wjiicli 
IS  necessarily  expensive,  and  a  hir^e  staff  of  salesmen. 
are  factors  against  which  the  small  broker  finds  it  im- 
possible to  conij)ete. 

In  order  to  buy  and  sell  paper  to  the  best  advantage 
le  modern  note-broker,  oi-  more  properly  the  dealer  in 
commercial  ])aper,  must  have  a  capital  ai)|)roximatimr 
5M.0()(),()()()  His  chents  demand  the  money  u|)()n  their 
notes  at  once  and  the  notes  must  be  held  several  days 
before  they  can  be  lealized  upon.  With  such  a  capital 
our  typical  dealer  in  commercial  paper  can  do  an  annual 
business  of  $10().()()().0()()  at  an  exj)ense  of  about  8l()0,- 
000,  or  one-tenth  of  1  per  (vnt.  He  can  make  a  '^ond 
profit  if  he  can  net  one-fourth  of  1  per  cent  or  even 
less  mari^in  on  the  ])aper  he  handles. 

4-Jl».  Diiiuind  and  .siijjj/l//  of  commcrc'ud  paper. — In 
times  when  the  demand  for  loanable  funds  is  <,n'eat  and 
the  ii.tercst  rate  liinh.  the  dealer  has  no  difficulty  in 
purchasi  ,  first-eiass  paper.  He  does  not  need  to  seek 
out  new  clients  but  on  the  contrary  is  kept  busy  market- 
in^'  the  pajHr  of  his  old  clients.  The  energies  of  the 
dealer  are  directed  almost  I'nlirelv  to  seiliiif.  'I'lu 
house  w  ith  a  well-or,i>anize(l  and  efficient  selliim-  fonv 
has  a  ^reat  advantane  over  competitors.  The  firm  here 
in  mind  has  twenty  salesmen  coverin<r  nearly  the  whole 
of  the  Cnited  .States.  Through  tlicse  anent<  it  is  en- 
abled to  keep  informed  on  the  money  situation  of  everv 
section. 

The  r:<te  of  interest  in  any  locality  is  determijied  by 
the  demand  i'or  and  the  supply  of  loanable  fimds.     The 


CHKDIT  DEPARTMENT  UF  A  BANK 


343 


r 


() 


forces  vary  from  time  to  time  with  more  or  less  reg- 
ularity. While  the  cotton  crop  is  being  marketed  in 
the  South,  for  instance,  the  demand  for  funds  is  very 
w-rtat  and  beyond  the  available  supply.  I>ate  in  the 
\ tar,  when  the  money  returns  to  the  banks,  the  supply 

loanable  capital  may  far  exceed  the  demand  and  very 
low  rates  of  interest  may  prevail.  There  is  scarcely 
any  locality  which  is  not  subject  to  these  seasonal 
tluctuations  as  well  as  the  accidental  fluctuations  which 
may  occur  at  any  time. 

\'M).  Areas  of  high  and  loic  rates. — The  monetary 
ronditions  of  the  whole  country  might  be  represented 
ill  much  the  same  way  as  the  weather  conditions  on  the 
weather  map — there  are  areas  of  high  money  and  areas 
of  low  money,  and  these  "highs"  and  "lows"  move  across 
the  map  with  more  or  less  regularity.  lieing  able  to 
predict  the  movement  of  the  "lows,"  the  expert  dealer 
in  commercial  paper  is  able  to  take  advantage  of  low 
interest  rates  wherever  he  finds  them,  while  the  borrower 
himself  is  confined  to  his  own  inmiediate  locality  where 
the  rate  most  of  the  time  may  be  higher  than  the  "low" 
in  some  other  section. 

Owing  to  his  ability  to  sell  paper  at  a  lower  rate  of 
discount  than  the  borrower  himself,  the  dealer  may  re- 
alize a  haiulsome  profit  v,hile  discounting  at  the  same 
late  as  the  local  banks.  As  far  as  the  rate  is  concerned, 
the  borrower  may  just  as  well  patronize  the  dealer  as 
the  banks.  There  are,  however,  four  additional  hiduce- 
nients  which  the  dealer  may  ofi'er. 

r.n.  Discount  offer  by  dealer. —  (1)  It  is  an  almost 
universal  rule  of  the  banks  to  reijuire  that  the  l)orrower 
shall  maintain  a  dej)osit  balance  e([ual  to  at  least  20  per 
cent  of  his  loan.  This  means  that  the  borrower  can 
actually  use  but  $80  out  of  every  $100  Ijorrowed  froui 


R 


lit 


lUi 


MONEY  AM)  B.\NKIN(; 


the  bank.     If  he  has  ho 


rrowed  at  the  rate  of  .5  per  cent 


or  everv  avail- 


ititcrest.  lie  aetiially  pays  over  (5  per  eeiit  f 

able  $100.     U  Ik-  sohj  liis  paper  to  a  dealer  hJ  would 

realize  at  once  the  full  face  value  of  the  1  .an. 


(•i)    liy  selling  his  paper  thr()u<.h  a  dealer  he  k 
his  credit  at  his  hank  nt^.^n  -itwi  iii.;.>i,v.,:..,„i    „..  ^i. 


ps 


)ank  open  and  urnnipan-ed,  so  mat  iii 
case  of  enierfrency  he  has  this  resource  to  fall  hack  upon. 

(3)  }W  estahlishinfr  relations  witli  a  dealer  he  creates 
a  broader  market  for  his  paper  and  may  reasonahlv 
expect  the  dealer  tt)  favor  him  as  an  old  eustomer  when 
otherwise  he  could  not  get  accommodation,  perhaps  he- 
cause  of  a  stringent  money  market  or  because  his  credit 
showing  was  not  satisfactory  to  those  with  wiiom  lie  had 
no  previous  dealings. 

(4)  Tlie  dealer  has  facilities  for  floating  a  much 
larger  loan  than  any  bank  could  handle,  thus  relievin^r 
a  large  borrower  of  the  necessity  of  negotiating  with 
several  i)arties. 

Dealers  in  commercial  paper  do  not  endorse  the  notes 
they  sell,  nor  do  th«^y  assume  any  liability  except  for 
their  genuineness.  The  notes  are  made  payable  to  the 
maker  so  that  they  may  be  negotiated  without  endorse- 
ment. The  success  of  a  dealer  is  so  closely  dependent 
uj)on  his  reputation  for  handling  only  good  jjaper  that 
he  will  use  every  effort  to  i)rotect  the  holder  against 
loss;  so  there  is  practically  little  risk  in  buying  his  paper. 
In  ca.se  of  a  failure  the  dealer  will  take  charge  of  the 
claims  of  hi.s  cu.stomers,  and  as  this  usually  makes  him 
the  largest  creditor  he  will  Ik-  able  to  jjrevent  undue 
loss  by  reason  of  unskillful  handling  ol'  assets  of  the 
failed  firm. 

4.'J2.  Cmlits.— The  ])est  guarantee  against  loss  fur- 
nished by  the  dealer  is  the  close  attention  given  by  the 
credit  department   to  every  note  sold.     The  most  effi- 


CHEUIT  DKl'ARTMKM'  OF  A  HANK 


345 


iKiit  credit  (k'partmt'iits  in  the  eoiuitry  are  those  main- 
tained hy  the  dealers  in  coniniereial  paper.  \o  cHent 
is  takt  n  until  his  tinaneial  conthtion  has  \\  ithstood  a  most 
search iii<:;"  investi<4ation.  A  statement  is  always  re- 
([uired  and  must  he  revised  at  fretjuent  intervals.  Kach 
salesman  has  copies  of  these  statements  to  show  to  pros- 
pect ive  customers.  Fnder  orihnary  circumstances  no 
[Kijxr  will  l)e  l)ou<»ht  l)y  the  dealer  uidess  the  statement 
of  the  maker  shows  (luick  assets  (cash,  mcrchindise, 
ami  hills  reeeivahle)  of  at  least  twice  the  value  of  the 
liahilities.  The  credit  department  may  he  regarded  as 
tlif  most  vital  part  of  the  husiness  of  dealinii"  in  com- 
niercial  [)aper.  Few  hanks  outside  the  largest  cities 
lia\e  ci'cdit  facilities  and  they  are  disposed  to  rely  more 
aiiii  more  on  the  information  furnished  hy  th(3  note 
dealer  as  experience  proves  its  reliahility  to  them. 

l-:i."{.  Si:::('  of  notes. — 'I'he  notes  sold  are  usually  di- 
vided into  amounts  of  $5,000  each  and  rarely  run  longer 
than  six  months,  tiie  average  heing  about  ninety  days. 
I'lices  are  (juoted  in  per  cent,  the  higher  the  rate  of  dis- 
cmint  tl:^'  lower  the  price  of  the  note.  For  example, 
a  note  for  .$.'5,000  due  in  six  months  without  interest  may 
It'  bought  by  the  dealer  for  (J  per  cent,  which  means  that 
it  would  yield  to  the  borrower  $.5. 000  less  the  interest 
nn  Sj.OOO  at  0  per  cent  for  six  months  ($1.)0) .  The  net 
yidd  would  be,  therefore,  $.5,000  minus  $1.50,  or  $4,8.50. 
It'  the  dealer  sold  it  immediately  to  a  bank  at  .5' j  per 
c(nt  for  six  months  (or  whate\er  time  remained  until 
tlic  note  was  due  in  case  the  dealer  had  held  it  for  a 
while),  this  would  amount  to  $4,802. ,30  ($.5,000  less 
'*i;<7..50) .  The  profit  to  the  dealer  would  be  the  differ- 
ence between  $4,8()2..50  and  $4,8.50.  or  $T2..50. 

The  business  of  dealing  in  commercial  paper  and  dis- 
t'ihutinu-  it   tlirougliout  the  comitrv  on   a   large  scale 


MICROCOPY    RESOLUTION    TEST    CHART 

ANSI  and  ISO  TEST  CHART  No    2l 


1.0 


I.I 


1.25 


U^yB      12.5 
2.2 


3? 


13.6 


1.4 


2.0 


.8 


1.6 


^    /APPLIED  IIVHGE    Inc 


'ft',  ^    f>T.*     Moir    ''.t»M!t 


■■!)! 


3+6 


I' 


MONEY  AND  BANKING 


is  so  recent  and  is  developing  so  rapidly  that  the  total 
effect  on  the  banking  situation  has  not  been  fully  worked 
out.  An  irievitable  tendency  will  be  to  equalize  the 
rate  of  inerest  throu','Out  the  country;  the  smallest 
country  bank  will  have  loaning  facilities  almost  as  good 
as  the  largest  city  bank.  There  will  be  no  inducement 
for  it  to  deposit  its  surplus  funds  in  New  York  at  1  or 
2  per  cent  interest  when  it  can  buy  first  class  paper 
at  much  higher  rates.  On  the  other  hand,  business 
firms  who  are  large  borrowers  will  have  a  market  for 
their  paper  as  wide  as  the  whole  Tnited  States  and  will 
thus  be  emancipated  i'nmi  l(K'al  restrictions. 


1 


CHAPTER  XXIV 


inSTOKV  Ol    HANKINC;   IN   THF.   I'MTED  STATES 


ft 


I'M.  CJiaractcrisfics  of  carl//  bankhi;i(.  -Tht  early 
111  loiv  of  l)aiikiiiir  ill  the  I'nited  States  is  for  the  most 
part  a  history  of  tlie  issue  of  eireulatintr  notes.  Prior 
t(r  the  national  hank  aet  of  1805  whieh  greatly  restricted 
noti-  issue,  the  deposit  eiu'reney  re])resented  hut  a  small 
jMiiportion  of  the  eireulatin^  medium  of  the  country 
and  hence  occupied  a  relatively  unimj)ortant  place  in 
tlic  business  of  hankin<4'.  l^articular  attention  must  he 
^i\en.  therefore,  in  a  discussion  of  hanking  prior  to 
I  (St;,"),  to  the  success  and  failure  of  the  various  plans  for 
issuing  notes. 

V.l').  licldtioiis  •iciih  govern mciit. — Another  function 
111'  early  hanking,  however,  was  to  facilitate  fiscal  op- 
nations  of  hoth  the  federal  and  state  governments. 
Although  this  has  continued  to  he  a  hanking  func- 
tiiiii  to  the  |)resent  day,  its  early  history  plairdy  shows 
that  it  is  not  a  safe  one,  however  eHicient  it  may 
s(irn;  and  there  is  a  marked  t'-ndency  toward  the  com- 
pete dnort'cnient  of  hanking  fVom  financing  govern- 
III!  nt  expenditures.  'iMiis  di\-orcement  has  already 
taken  ))lace  in  the  opeiations  of  the  stales,  and  remains 
iti  the  operafiotis  of  the  federal  government  oidy  in 
the  requiiement  that  hank  notes  he  secured  hy  a 
(i(  posit  of  govermuent  honds  with  the  Tn-asury.  a  re- 
(luireincnt  which  creates  a  fictitious  deman<l  for  lK)nds 
and  so  lowers  the  interest  rate  that  there  is  practicallv 
11(1  demand   for  them  except  from  the  hanks.      In  this 

347 


348 


:\roNi:v  and  bankin(; 


I 


way  it  is  still  a  fiuiction  of  l)aiikiiig-  to  finance  govt'ni- 
iiunt   loans. 

-t.'JC.  m.storical  periods. — Tlie  history  of  })anking  in 
the  Tnited  States  may  he  divided  into  lour  periods:  (1) 
First  l)ank  of  the  Tnited  Slates;  (2)  Second  Hank  of 
the  rin"ted  States:  (.*})  state  hankino-,  and  (4)  national 
l)ankifi<r.  In  j)oint  of  time  these  periods  are  not  at 
all  distinct  l»ecatise  they  overlap,  hut  there  was  a  period 
in  which  each  was  the  most  im])ortant  development  in 
hanking'. 

4.'}7.  SoDic  cavhi  /;a//A.v.— Pi'ior  to  the  estahlishment 
of  the  First   Hank  of  the  Fnited  States  several  hanks 
existed  which  are  worthy  of  iiote.     The  first  one  estah- 
lished  was  t) -  Hank  of  North  America  in  Fhiladelphia, 
chartered  hy  C'onnrtss  in   17H1.      It  was  capitalized  at 
.1<40(),()00;  $2.5().()()()  heinn-  snhscrihed  hy  the  ^rovernment. 
C'onsiderahle  donht  existc<l  as  to  the  powers  of  Congress 
in  charterin^r  a  hank,  hence  in  17H2  a  charter  was  oh- 
tained   from  the   State  of   Pennsylvania.     During  the 
years  of  tinancial  chaos  that   followed,   the  hank  per- 
formed  an   inestimahle  service  hy  makino-  large  loans 
to  the  government   for  the  maintenance  ol'  the  army. 
In  spite  of  this  service  the  !)ank  was  severely  attacked 
after  the  close  of  the  war.  and   for  several  years  had 
an   extremdy    j)recarious   existence;    it    was    finallv    re- 
chartered   hy   the  State  of   I'ennsylvania.  under  which 
charttr   it    i)ros|)ered   until   it    hecame  a   national   hank 
in  1H(;."). 

The  Hank  of  .Massachusetts,  with  a  ca|)ital  of  $.'J0().- 
()(M),  was  chartered  hy  the  State  of  .Massachusetts  in 
ITHI".  In  the  samr  year  the  Hank  of  New  \'()rk  was 
estal>lish((l  hy  .Mcxandei-  Ilamdton.  lor  several  years 
it  ixisted  as  a  prix.ilc  l);n\k  l>Mt  \\  ;is  fin.MHv  rh.-ii-tfriM! 
hy   the  Icgislatun    in    ITIM.      In  hoth  states  an  attempt 


IIISTOHV  OF  BANKING 


SVJ 


uas  made  to  regulate  banking  in  the  interest  of  the 
piihhe  welfare,  and  as  some  of  the  problems  wliich  the 
Kgislature  attaeked  are  still  with  us  their  consideration 
is  interesting. 

The  most  im})ortant  restriction  dealt  with  the  issue 
of  notes.  In  Massachusetts  it  was  provided  that  the 
outstanding  loans  and  notes  or  credits  and  debts  (ex- 
cept to  depositors)  should  not  amount  to  more  than 
twice  the  paid-in  capital:  in  \ew  ^'ork,  the  debts  of 
the  bank,  over  and  above  the  money  then  actually  de- 
posited in  the  bank,  \\ei"e  not  to  amount  to  more  than 
three  times  tile  j)ai(l-in  capital.  Thus  a  distinction  was 
made  i)etween  the  lial>ility  of  a  l)ank  to  its  note  holders 
;inil  to  its  depositors:  and  there  is  no  doubt  of  the  ex- 
istence of  a  reason  for  this  distinction  at  that  time. 
The  deposit  cunency  was  not  de\  eloped,  and  when  bor- 
rowtrs  a|)])eare(l  they  wanted  notes  which  they  could 
use  as  money.  Deposits  were  not  created,  therefore,  by 
loaning  as  they  ai'c  to-day,  but  entirely  by  the  actual 
deposit  of  money,  a  process  which  did  tiot  in  any  way 
ineiease  the  pro|)oi-tion  between  the  bank's  demand  obli- 
gations and  its  unmatinrd  assets.  The  dej)osit  account 
was  exchanged  for  moniy.  whereas  the  bank  note  was  ex- 
<liMnged  for  unmatured  credit. 

Kiith  hanks  weie  prohibited  from  dealing  in  merchan- 
dise, and  till-  Hank  ol  New  ^'(>lk  from  traiiitig  in  the 
stocks  of  tile  I'nitcd  States  oi-  any  of  tin  states.  This 
was  ividently  an  attempt  to  sej)aiate  banking  and  gov- 
ernment and.  as  such,  was  a  cori'eel  prinei|)le. 

4.'iH.  lAunihis  oil  I'oiih'  .v/ocA'.  The  liank  of  Massa- 
chusetts was  ))rohii)ited  fiom  dealing  iti  l>ank  stocks, 
.inother  jjrovi^ion  which  was  fimdamentally  sound, 
lilt  piai'iicc  oj  dealing  in.  or  lainer  ioaning  on.  bank 
stocks 


ii.is  many  dangers,  as  was  am[)ly  proved  in 


11 


le 


m 

i 

i^ 

.inle^^H 

,'}oO 


:\:o\KY   AND   HA\KI\(i 


m- 


If. 


pari.c  of   I  nor.      It  enables  unscrupulous  financiers  t.. 
Ihiv  one  hank,  deposit  their  stock  with  it  as  colhite.al 
for  a  loan,  and  with  the  proceeds  of  the  loan  to  purchase 
the  controllino-  stock  in  another  hank.     This  operation 
may  he  continued  until  a  nuniher  of  hanks  are  under 
the  same  ownership,  the  henetit  to  the  Hnancier  arisin^r 
from  the  fact  that  he  obtains  control  and  conserjuently 
increased  credit  from  them  all.      Its  dan^^er  is  (hie  to 
the  fact  that  any  calamity  which  affects  one  bank  must 
affect  them  all.     The  Hank  of  \ew  \-ork  was  restricted 
from   loanin,ir  on  real  estate,  or  holdinrr  it  except    foi 
l)ankino-  purposes  or  when  it  came  into  its  possession 
m  settlement  for  debts  i)reviousIy  contracted.     This  was 
likewise  a   wise   i)rovision  and  one  which   is   found   in 
practically  the  same  form  in  our  i)resent  national  bank- 
ing- law . 

4.3!).  First  liauk  of  the  Vmtcd  States.— Tha  First 
Bank  of  the  Tnited  States  was  chartered  by  ConniTss 
in  171)1.  The  charter  was  ^ranted  in  spite  of  strony 
opposition  on  the  i)art  of  those  who  inveif.hed  against 
the  tendency  toward  centralization  of  ^^overnment,  hold- 
inn-  also  that  ("on^nress  was  not  em])owered  by  the  Con- 
stitution (o  create  banks.  Alexander  Hamilton,  then 
secretary  u\'  the  treasury,  took  the  <,n-ound  that  this 
l)ower  was  an  im|)lied  one,  and  his  opinion  prevailed. 

The  bank  was  capitalized  at  8 1 ().()()().()()(),  divided  into 
2.>.()()()  shares  of  .SMH)  each.  Of  this  total  ca|)ital  .t2,0()().- 
000  was  subscribed  by  the  «o\ernment  and  paid  for  in 
installments.  The  remainder  was  subscribed  by  the 
I)ublic.  one-fourth  in  specie  and  the  balance  in  ^(nern- 
ment  securities  |  bearing-  interest  i.  The  bank  was  o(,v- 
<'rned  by  a  board  of  twenty-ti\  c  .lireetors,  not  more  than 
t liree-fonrt hs  <!!'  wh'.!.!  ii.!...  :.!|..;!!..!;:  ('..:•  -.-..  ..I....!: v  , 

stockhol.hr  was  entitled  to  more  than  thirtv  votes,  no 


HISTORY  OF  HANKING 


351 


niattrr  how  larg'c  his  hohlings,  and  foreig'n  stockliolders 
(iiiild  not  \otc'  by  ])roxy.  The  bank  could  loan  on  real 
t'statc  but  could  not  hold  it  except  for  bankintr  purposes. 
It  could  not  trade  in  commodities,  nor  purchase  addi- 
tiiiiial  government  securities.  The  same  distinction 
lu  tween  notes  and  dej)Osits  that  appeared  in  the  Massa- 
chusetts law  was  reco<ifni/ed,  and  it  was  provided  that 
the  l)ank  could  not  become  indebted,  except  for  deposits, 
to  ail  amount  ^reat'-r  than  its  capital  stock.  The  char- 
ter was  to  expire  in  twenty  years. 

440.  Siiccrs.s  of  the  first  hank. — The  bank  enjoyed 
success  from  its  incej)tion.  Hratiches  were  established 
at  Xew  York,  Boston.  Baltimore,  Washington,  Norfolk. 
Charleston,  Savannah,  and  New  Orleans.  The  central 
iiank  with  a  capital  of  $4,700,000  was  in  Philadelphia. 
It  ac(juired  dcjHJsits  of  government  money,  receiving 
prnhably  two-thirds  of  all  money  deposited  in  banks 
1)\  the  Treasury.  It  paid  dividends  for  twenty  years 
at  an  average  rate  of  8  per  cent.  It  loaned  commer- 
cially, and  became  a  jjowerful  influence  in  establishing 
a  sound  currency. 

The  bank's  loans  to  the  frovernment,  however,  the 
installments  on  the  original  ])urchase  of  stock,  and  fur- 
thir  advances  to  be  paid  out  of  revenue,  were  not 
promptly  paid  and  in  170.)  had  increased  to  over  $(>,- 
(Mil). 000.  There  was  no  market  for  government  bonds, 
hence  it  became  necessary  for  the  government  to  sell 
iK  stock,  which  it  did  in  1H02.  This  sale  had  only  a 
iirtiellcial  effect  on  the  bank,  and  it  is  hard  to  justify 
a!  all  the  government's  part  ownership  of  it.  When 
Ihe  bank  was  organi/eil  the  govenunetit  did  not  netd 
credit;  it  was  given  no  control  ovei"  the  bank  except 
the  right  to  investigate  its  affairs,  which  it  seldom  ex- 
t  rcised.      Hence  the  bank  was  not  made  anv  more  secure 


^ 


44» 


352 


MONEY  AM)  BANKING 


!  !■ 


m 


as  a  place  of  deposit  for  ,i.overnm(nt  iinids;  ami  it  had 
no  surplus  ou  hand  to  luvest.  If  the  /rovernnient  hc- 
came  a  stockholder  for  the  sake  ol'  profit,  its  jud^nnent 
was  correct,  for  the  dividends  of  8  per  cent  were  paid 
annually,  and  the  stock  it  held  was  sold  at  a  eonsiderahle 
advance. 

441.  Opposition  to  rcchartcr.—ln  1800  the  stock- 
holders petitioned  C\)n<.rcss  for  a  renewal  of  the  charter. 
and  their  petition  was  ably  indorsed  hv  a  report  from 
Secretary  of  the  Treasury  Gallatin.  lie  reviewed  the 
successful  history  of  the  hank  and  recommended  th.it 
Its  capital  he  raised  to' .$;j(),0()0,()()(),  three-fifths  of  whidi 
It  should  he  forced  to  lend  to  the  ^n)vernment.  Vn- 
fortunately,  however,  C"on<.ress  failed  to  act  and  the 
question  was  tabled  until  the  succeedino^  C'on^rrcss. 
\\\\vn  the  question  a^ain  arose  in  1811  opposition  to 
the  charter  was  not  only  stron^^  hut  or^ranized. 

First,  those  who  believed  in  a  strict  construction  of 
the  Constitution  Mere  a^^ainst  the  bank.     Second,  the 
Kepublicans.  now  in  power,  denounced  the  hank  as  an 
aristocratic  institution.     They  })ointcd  out  that  three- 
fifths  of  its  slock  was  in  foreion  hands.     A  majority 
of  this  was  held  m  En<rlan(l,  and  a  war  with  that  countrv 
was  imminent.     \ot  pausin^r  to  analv/e  the  reoulation"s 
which    prevc.ted   control   of   the   bank    bv   foreign   in- 
terests, or  more  probably  for^ettiuK  this  regulation  for 
their  own   p.)litical   purposes,  they  uri-ed  that  in  case 
of  war  with   England  the  liank  of  the   Cnited  States 
woul.l  lin.l  itself  in  Kin<r  (;eor^re's  hands.     Third,  the 
state  banks  and  the  political  enemies  of  Secretary  (ial- 
latin  had  had  time  to  combine  a«-ainst  the  .^overnme  it 
bank  and  its  chami)ion.     T!ie  result  was  a  vote  to  post- 
pone iWiiisiiun^xy   iiu    reneu;ti  (.r   iiie  charter,  and  the 
dissolution  of  the   bank    followed   imiiiediaielv. 


he 


IHSTUUV    Oi    J5ANKI.\(;  ;i.-,;l 

U-J.  Second  lianh  of  the  ('iiitcd  Stutrs.—Thc  Scr- 
\)\\(\  Hank  of  the  rnitcd  States  was  llie  result  of  the 
tiiiaiieial  ehaos  that  followed  the  (hssolution  of  its  pred- 
(c.ssoi-.  The  W'dv  of  ISVJ  found  the  ^'overnuieiit 
luiids  de[M)sited  in  state  hanks,  a  hir<^-e  nuniher  of  whieli 
IkhI  spruno-  u|i  with  the  ])assino-  of  the  First  Hank. 
Tlicse  state  hanks  were  poorly  niana^ed.  and  in  ISl  i 
s|i( cie  i)aynit  lit  was  snsjx-nded  hy  all  hanks  exeept  those 
in  Xew  Knoland.  The  <i-overninent  defaidted  on  the 
iiilerest  oi'  the  pu})lie  deht.  I'ank  notes  eireulated  only 
ii!  a  eonsiderahle  diseount.  vai'yin"^-  with  the  reputation 
111  the  issuing-  hank.  A  o-o-, eminent  hank  was  |)roposed 
in  ISIJ.  to  he^iiin  l)usiness  undei'  a  suspension  of  s|)eeie 
|i,i\Mients.  hut  it  was  not  until  IHKI  that  the  Second 
l^ink  was   founded. 

It  was  caj)itali/ed  at  -S'J,3.()()().0()().  one-fifth  of  wjiieh 
\vas  suhserihed  hy  the  <4-overnnient.  Prixati'  suhserij)- 
tiniis  were  ])ayah!e  one-fourth  in  speeie  and  the  halanee 
in  i4()\ennnent  honds.  Tjiiily  per  cent  \\as  <hie  at  onee 
;Mid  till'  halanee  in  e(]ual  installments  at  the  end  of  six 
anil  twelve  months.  The  n'overmnenfs  suhscription 
\^.is  j)ai(l  in  notes,  and  it  nceived  si ,.)()0,()()()  as  a  bonus 
!'"r  i>riintin<4'  the  charter. 

'l'!ie  chai-ter  was  modeled  after  that  of  ^hv  First 
Hank.  It  was  to  he  the  depository  of  pul)lic  funds. 
It  was  to  he  yoNerned  hy  t\\cnty-ti\e  (hrectors.  i\\c  of 
\^  horn  wvvv  to  he  named  hy  the  Presideut  of  the  [ 'nited 
>l;itcs.  Its  notes  were  made  i'ecei\al)le  for  ail  (lel)ts 
i"  the  federal  .u'o\  (  rmiient.  l-'oreinrn  stockholders 
"Mild  not  \()te.  It  was  re(iuiri(i  to  j)ay  (le])osits  as 
Will  as  notes  in  specie,  and  a  forfeiture  of  12  per  cent 
''.IS  i)ro\  ided  in  i-ase  it   faded  to  do  so, 

W.i.  liidcmpt'uiii  of  tiiiics  i;i  spicic.  This  was  a 
gicat  step  toward  sound  hanking.     Although  deposits 

VII— ,'3 


334 


.AI()Ni:v   AM)  HAN  KING 


\l 


[i  -■ 


lit! 


Mk 


'!!i 


Iiad  ;il\vays  horn  iioiiiiiially  payalilc  in  spo'cic,  tlic  cns- 
toiii  had  ^row  fi  up  ol'  paying-  them  in  Uw  iiotcfc  of  dlli.r 
sptrie  i)ayino>  hanks.  If  tlicsc  hanks  hapiH'ncd  to  hr 
i-einote  the  nnlcs  circ'iiialcd  at  their  fair  vahic  less  the  <\- 
prnsc  of  n'(icnipti(.n:  the  rcsnlt  was  a  non-nniroi-ni  vuv- 
nncy.  W'liilc  tiir  nrw  i(  ouhitidn  did  not  cniirclv  pre- 
vent the  eirenhition  of  si-wral  kinds  of  eni'reney.  il 
lielped  to  do  so.  and  was  a  I'eeonnition  of  the  statns  ami 
possil)ilities  of  the  de])osit  system.  The  foi-feitiu'e  ol' 
12  iKT  cent  in  ease  of  suspension  of  speeie  jjaynients 
was  intended  to  prevent  a  profit  hein^r  made  from  sus- 
pension. Many  of  the  state  hanks  liad  heen  ahle  to 
pay  (hvidends  when  they  eoidd  not  redeem  either  their 
own  notes  or  deposits  e.\cej)t  in  the  tiotes  of  other  non- 
Sj)ecie  i)ayment  hanks. 

444..  Mis)ii(in(tu:c)iuiit  of  llic  h(niJ,\  —  Vudvv  this  char- 
ter twenty-fi\e  hra.nehes  were  estahhshed  and  the  hank 
soon    hrouo'ht    al'out    resum|)tion    of    s[)eeie    payment. 
This.   howe\e!-.   was   the   only    henefit   it  conferred    for 
the  first  two  years  of  its  existence,  as  it  was  shamefully 
mismanaged.      Karly  in  its  career  it   heoan  to  loan  to 
stockholders  on  stock  which  was  not  yet   fully  paid  for. 
Speculation   in  the  stock   foilovved.   its   pi'icr  advancing 
and  the  hank  Ioani!ii>  its  pai-  value  freelv.      The  charter 
l)ro\i(Jed    that    no   (li\idends   shoidd    he    |)aid    on    stock 
wjiich  was  not    fully   paid   for.  hut  tiiis  reouiation   was 
violated.     The   Haltimoi-e  hranch  was  in   (lu-  hands  of 
nnscru]»nlous  ofIice<-s  who  detrauded  il   of  laro-c  sums. 
Hence,    up    to    ISin   th"    Seeon<l    IJank    ol'   the    Tnited 
Sta.tes   was   managed    in    such   a    way    that    the   dej)o^if 
of  i)uhlic  funds,  amountin,^'  to  more  than  -SH.OOO.UOO. 
was  yreatly  endanneixd.  and  the  hank  itself  was  a  dis- 
grace to  the  nation. 

Jn  ISli)  31r.  Lano'don  Cheves  of  South  C'aj'olina  wa^ 


tt* 


HlSi()H\    ()1-   HANKINCi 


3.-)5 


I 

i 
5 


I 


cIctUd  president  of  tlic  hank,  lie  ininiediatcly  set 
;i!i(Mit  correct  iiiL>  tlic  \ai-ioiis  abuses  that  had  spniiio^  up. 
r(di!ciii.<4'  loans  to  stockhohlcrs.  incrcasiiin-  ivsci'\cs  hy 
iiiiportalioii  of  sil\ci\  and  rc^;idatin<4'  the  issue  of  notes. 
His  administration  was  so  husincss-Iike  that  tiie  \nv.\k 
soon  regained  popuhn- confidence  and  j)i'ospered  ^n-catlv 
the  '  nsuin<4'  decade. 

The  constitutionality  of  the  ^overnnienl  hank  was 
settled  in  18U)  when,  tlie  Su|)reiiie  Court,  hy  C'ln(  f 
.fiistice  .Marshall,  handed  down  the  decisio?i  that  the 
istahlishnient  of  the  hank  to  assist  the  fiscal  oj)erations 
of  tlu'  ^(nernnicnt  was  an  iiiij)lied  ])()wer  of  the  Con- 
stitution. It  was  further  decided  that  the  states  had 
i\n  power  to  tax  the  circulatin^r  notes  of  the  federal 
li.ink  or  of  the  other  state  hanks.  ]?oth  decisions  were 
(  xtieniely  iniportar.t  because  a  different  rulin<»'  on  either 
would  have  made  inii)ossil)lc  not  only  tiie  Bank  of  the 
(  nited  States  hut  our  })resent  national  bankin<r  system. 

1-4-,).  Jackson  opposed  to  tJic  J)anJx. — When  iVndrew 
.laekson  became  President  of  the  United  States  in  1821» 
Xiiliolas  Hiddle  was  at  the  head  of  the  I)ank.  The  (|ues- 
1  "M  of  the  renewal  of  the  charter,  which  was  not  to  ex- 
piit  until  1S.'J().  immediately  became  prominent.  .Jack- 
al mi  was  inclined  to  object  to  the  bank  on  constitutional 
tii'ounds.  and  his  antipathy  was  increased  by  charjies 
''i(/iioht  a^fjiinst  various  otHcers  of  the  bank  by  his  ow  ji 
political  associates.  Tlis  niessa^'c  to  Congress  in  1H2!> 
plainly  showed  his  antij)atliy,  but  in  IS.'JI  he  spoke  in 
I  niildiM'  tone.  lie  \\as  still  kriown.  how(,\ei-.  as  an 
opponent  of  the  bank.  In  IS.'il  I  lenry  Clay,  the  candi- 
date for  President  on  the  W'hi^  ticket,  came  out  em- 

uhatied.lv   for  .•■   rfp.fu;!!  f^f  tlif  i'h!>rf.'>r        '!'!•..->  l-.-sj-.l-  -.•,■•:- 

'■•■nerally    populai-   and    Clay   was   rtiemptini;-   to  cap- 
i.iii/.e  that  popularity.     JJefore  the  election  a  hill  pi-o- 


'4 


;5.-)() 


.M()M:V    AM)   H.WKINC, 


Itii 


vidiiiir  for  the  ixiic^val  oT  tin  cli.'trtcr  was  |)assf(i  1)\ 
C'oiin'i'i'ss  and  \i't(H(l  liy  Prcsidi  lit  Jackson,  so  that  tin 
(luc'stioii  lu'cainc  the  priiu-ipal  issue  ol"  the  ciisiiiiin-  caiii- 
l)aioii.  TIic  (11(1  of  the  Sccoiid  Hank  of  the  riiitdl 
Stales  was  in  \  iew  when  Jackson  was  elected. 

Ill  1S.'{,'J  the  ^overnnient  deposits  were  withdrawn 
I'roiii  the  hank  and  c-uicellation  of  the  <4<)\  i  rniiient's 
sto'-k  was  reciuested.  To  pay  off  this  ohlii.-ation  \u\\ 
stock  was  sold,  and  the  hank  ohtained  a  charter  from 
the  State  of  Pennsyh  ania.  It  was  never  auain  siiccess- 
t'ul.  however.  princi|)ally  hecanse  its  ea])ital  was  too 
lar-i^e  for  operation  in  Philadelphia.  It  was  comjjclled 
to  loan  lai'^e  ainonnts  on  the  stocks  of  \  arions  companies 
which  Wfi-c  hein^-  formed  in  all  parts  of  the  country. 
The  panic  of  ]  S.'JT  madt  many  o''  these  stocks  worth- 
less, and  the  hank  was  forced  to  suspend.  In  IStl  it 
ii<i'ain  suspended,  and  went  into  li(|uidati()n.  Its  credits 
were  paid  in  full  hut  tlie  stockholders  receixcd  nothing. 

The  history  of  these  two  hanks  is  interestinn-.  not  so 
much  hecaiise  of  the  various  restrictions  on  loans,  note 
issues,  etc..  as  on  account  of  the  effect  of  tluir  intimate 
I'elatioii  with  and  dej)endence  upon  the  ;4'o\ criiment. 
In  hoth  c-ases  the  hanks  j)erl'ormed  n-reat  ser\icc.  The\ 
were  hoth  successful  financially,  'i'heir  failure  was  due 
to  the  fact  that  they  hecanie  iinolved  in  politics,  as 
any  hank  so  chartered  must  hicome  in  a  countr\-  where 
parties  and  administrations  arc  constantlv  chan<J'in<''. 
This  is  tlie  argument  now  iiru'ed  ai^ainst  the  creation  of 
any  kind  oremtral  hank  in  the  rnited  States. 

MC.   .S7^//e    Ixiiihiii;^-. — liankmo-    under    charters    ob- 
tained from  the  \arious  states  wji  -  of  two  kinds:      ( li 

'     ■   ■ i i  •.  I  ■-  - 1  :.-.v  *.  :      tt  -*     *^  *.  •*  :;  4 : ;  v"  I      Wiii  j  ivS,     tl  i  i  •  t 


CJ)  hanks  in  which  the  states  themselves  had  an  interest. 
The  first  class  is  of  importance  cliietly  from  a  tecjinical 


■ '  ?-- 


HISTOUV  Ol-    H\\M\(, 


;l-)T 


|iniiit  ol'  \  icw,  j).trti<'iil;irly  in  I'cnard  to  \hv  success  ol' 
liic  sivci'al  |»l;iiis  adopted  for  iIk  iss  •''  lu  les;  tlic 
<ic()ii(!.  hicaiisc  ol'  IIk  lael  thai  llie  states  were  iiiti- 
iii.ilcly  connected  with  their  niaiia<^'enieiit. 

'l\\r  early  hanks  oi'  I'ennsy haiiia.  Massachusetts,  and 
N(\\  ^'o|■k  ha\e  already  heeli  nient'')lied  :  and  i-elVrence 
has  heiii  made  to  othei'  state  hanks  which  wei'e  in  e\- 
isteiici'  (hu'in^-  the  hi'e  ol'  the  hanks  of  tiie  ( 'nited  States. 
'i  lie  most  notahk-  mo\'ement  toward  sound  l)ankin<i'  took 
jilaee  in  \ew  iMiylainh  particuhwly  Hoslon.  and  in  New 
\'.irk. 

11-7.  Siif/'olL'  Ixtiil:  siisUin.-  \\\  \ew  Knyland  in  the 
1  ;!ily  pai't  oi'  the  centiu'y  the  same  eonthtions  prevailed 
ill  reyaiil  to  the  circidatinn'  mc(hum  that  existed  in  IMiil- 
,1  hlphia  ])i'ior  to  the  estahlishment  of  the  Second  liank 
III  the  I  'nited  States.  'I'he  notes  of  country  l)anks  eom- 
jiri'-i'd  a  lar^e  |)roj)ortion  of  the  currency,  even  in  the 
iiMiimercial  centei's.  'i'hey  circulated  at  a  discount  I)e- 
caiise  ol'  the  expense  ol"  re(lem])tion.  hence  they  (juickly 
unne  the  nott's  of  the  city  hanks  out  of  circulation,  and  as 
they  wei-e  not  recei\ahle  at  par  at  tli'-  city  l)anks  while 
tlie  notes  of  the  city  hanks  were,  the  latter  uatui'ally 
were  presented  for  jjayment  and  the  depreciated  notes 
(iiiilinued  to  cii'culate. 

In  ISIH  the  Suffolk  Bank  was  incoi-jjorated  in  lios- 
t'ln,  and  it  immediately  endeaxoix'd  to  work  out  a  ])lan 
h\  which  it  could  make  a  pi-ofit  I'l'om  the  redemption 
<ii'  countiy  hank  notes.  It  otl'eivd  to  make  itsell"  an 
a.miit  of  redcmj)tion  for  the  country  hanks,  at^reeiui^' 
to  ucce|)t  their  notes  at  par  |)in\  ided  a  dej)osit  was  kept 
with  it  to  pay  it  foi-  the  trouhle.  ^At  first  onlv  a  small 
Miiiiiher  of  hanks  axailed  themselves  ot'  the  privileyr. 
I'lit  the  Suffolk  Hank  i-(  taliated  hy  setidin;^'  home  for 
ivdemption  the  notes  of  all  hanks  \\hicii  did  not  adopt 


If 


lit ^  :  '^ 


^1: 


.'ioS 


M()M:\     AM)   HA.\K1\(; 


tlic  plan.  Tlif  fiii.'il  rrsult  \\;is  tli;it  ))i';u'ti(';illv  all  IIk 
l>aiik,s  ill  New  l\ii<4laii(l  Ixcaiiif  iiiciiihcrs  of  the  Snn'nik 
svstt'iii.  wliifli  c'oiitiniud  until  tlic  national  Itankinu  law 
of  18(;.->. 

It  soon  l)fcanif  a  cIcarinLC  Iiohse  for  hank  nok's.  ainl 
jiisl  as  tlu'  c'iiy  ck'aiin^'  houses  oll'sct  the  I'i'cdits  and 
(Ichits  of  the  xai'ii.us  hanks  against  each  otiu  r  in  siicli 
a  way  that  only  halancis  ai'c  j)ai(l  in  cash,  si  the  Siitrojk 
l)ank  canceled  the  hank  ohlinations  of  all  Xew  Imil;- 
iand.  In  ISl-.l  the  Massachusetts  law  \',as  ciian^'ed  to 
l)ro\  idc  that  no  hank  should  pay  out  any  notes  excipl 
its  own,  a  |)i-)\ision  which  strengthened  the  Suil'iilk 
systcDi  l)ecaus(.'  it  made  necessary  (luick  I'cdeniption. 
All  hank  notes  issut'd  would  circulati  in  the  pockets  and 
tills  of  the  pe;)])le  as  lony  as  thei'e  was  actual  denia.iid 
foi-  them:  when  this  demand  suhsidtd  th;\-  would  \>v 
dcpositeii  in  a  hank,  and  since  the\-  could  not  ayain  hr 
paid  out  tiny  would  Ik  (|uickl\-  I'cdeiincd  at  the  SuHdHx 
Hank. 

Dufino'  the  yreatei-  |)art  of  the  existence  of  the  .Suf- 
folk Hank  there  was  no  piox  ision  in  Massai'husttts  fof 
kccpiiio'  a  specified  I'tsei'x  i'.  The  system  worked  so 
well,  in  fact,  that  specie  was  seldom  demanded.  I  !i 
1H.")H  the  leijisl.-itin'e  passed  a  law  pro\  idiiiLi'  l<>ra  rescr\c 
of  1.")  per  e(iil  against  hotli  notes  .and  di  posits.  'I'liev 
Were  thus  recoLini/.ed  as  liahililies  of  the  haid<.  eipial  mi 
evei'y  I'espi ct  ;  nor  was  thei'c  any  reason  I'oy  tlivin^'  tli< 
notes  ;i  prefereiiee  or  lua I ul aiuHii^  a  s|)ecial  i'es(  i\c  I'm- 
till  in  under  the  system  of  ijiiick  ri  deiiipt  ion  which  i\ 
isti-d.  The  iiotis  weiT  not  iiileiided  for  general  einii- 
lation  hut  foj-  redemption  w  h' n  tin  nerd  for  iJu  ni 
dis.ippeared.  in  tin  same  maniiei-  thai  our  checks  ;md 
drafts   an-   ri.de(iii(d    to-da\.      I  ndi  r    this   s\slem    tin 


IIIS'IOHV    OF   l{ANKI.\(i 


;i.->y 


i\ 


■Awni^c  'ilV  <'!'  tlu'  l);iiik   note  was  t'oiiiul  to  he  altoiit 
ti\  e  weeks. 

44S.  Xi'xc  Varli  sf/.stcnis. — The  hanks  of  New  ^'ork 
\\(i-e  oj)erate(l  alotiy-  different  lines.  There  were  two 
|ilans  of  note  issue:  (  1  )  The  safety  fund  system  and 
r2)  Ihe  hond  deposit  or  tree  hankin<4'  system.  The  th'st 
is  espt'cially  worthy  of  noie  hecause  of  the  reeent  pi'o- 
[I'lsal  of  the  Demoeratie  I'arty  that  i)ank  deposits  he 
niiai'anteed  hy  tlie  o()\  fniment.  a  |)roposal  whii-h  I'ests 
nil  the  same  hasis.  'IMie  second  plan  is  interestin<^'  he- 
cause  il  was  adopted  l)v  the  federal  <4()vernment  in  lH(i.') 
Ill  sfcui'c  the  nolc  issues  of  the  national  hanks. 

tH*.  Sdfi'lfi  fund  s//.st(i)i. —  The  safely  fund  system 
was  estahlishcd  in  1H2'.>.  Ivicii  hank  was  rciiuired  to 
cniiti-ihutc  annually  one-half  of  1  |)er  cent  of  its  capital 
111  a  s|)ec!al  fund  in  the  hands  of  the  states  until  its 
ciiiiirihutions  should  amount  to  '.i  per  cent  (d'  its  capital. 
(  )iit  (d'  this  fund  all  the  dthts  of  failed  hanks  (cxc-ejjt 
lliuse  to  stockholders  on  their  stock)  were  to  he  paid 
;iller  the  assfis  of  the  hank  had  heen  exhausted.  In 
is;{7  the  law  was  amended  so  that  the  notes  of  failed 
li.iiiks  could  he  paid  immediately.  pro\  ided  they  did  not 
aiiioimt  to  more  than  two-thirds  of  the  money  in  the 
rmid.  In  that  ycai-  sc\t'ral  hanks  failed  and  their  notes 
siilfcred  no  dcpicciat  ion.  After  IHtd,  however,  the 
niiiiihcr  of  hanks  wliicii  failed  was  so  lar<4'c  that  the 
safi'ty  fund  was  Ino  small  to  meet  all  theii'  oliliLjations, 
li"lli  notes  and  di  posits.  .Vccordiunly  in  1  S  l^.'{  the  l.iw 
was  ai^ain  ariK  ndi  d  so  that  the  fund  was  made  applica- 
hle  otd\  to  the  paxiiiiiit  of  the  nol( -,  of  the  insoKeiil 
!>anks. 

t.">(>.  Hi, 11(1  (liposil  s//.slt!li.  In  IH.'JS.  ||owe\ei\  the 
IhiikI  deposit  systiin  was  t  stahlished,  and  al  tei"  that  dale 


m 


m  .i\ 


m^  ■V  M 


*    9 

.-I 


SGO 


MoMV   .\\i)   i].\\KI\G 


iill  i^-.  hunks  iiic'or[)()rat(.(l  uikKt  lliat  plan.  'J'lus 
Mrakcjicd  tlic  s;it(ty  I'uikI  hccaiise  Ihci'c  wlvc  iki  ikw 
contrihiitions  to  it  and  Ww  hur-l'Mi  IVII  iipoi  i  ronstaiitiv 
<kcrrasin<i'  miiiiln!-  of  l)aiiks.  I  r.  ISir.  tlir  new  consti- 
tution of  \c'\\  \  oris  |)ro\  i(it(|  tlial  note  holders  wcir 
to  have  a  lii'st  litn  on  all  tlif  assets  <;t'  a  l>ank  and  that 
ii)  casi'  of  failnic  slocklioldiTs  wtTc  to  he  liahk'  for  an 
amount  c(|ual  to  tlicir  hnhh'n^^s  of  stork.  It  furth(r 
j)r()\i{lcd  tiiat  no  siucial  t-hai-ieivs.  such  as  those  under 
v.hicli  the  safety  fund  haid<s  opeialeck  were  to  he 
^-ranted  or  i'.aie\\e(k  Tluis  the  safety  fund  system 
^•ra(hially  dwd  oui  with  the  e\i)iration  of  the  chartei's. 
the  Last  (d'  which  (xpired  in  JHOO.  ^\1|  claims  against 
it  were  paid  in  fidl. 

4.11.   Mist(il,(.s  i,f  tin   ,s//.v/. ///.— -The  safety   fmid  s_\  s- 
tun    faihd    Ik  cause   of   mistakes    in    ditail    rather   than 
tiu-ou.iih    fundamental   delects.      The   fund  at   tlie  start 
should  have  hun  made  appiicahle  oidy  to  the  payment 
of  notes.      Its  re.il    function   was  to  jji'ox  ide  a  uniform 
(au-rency   which  anyone  mi;.iht  accept   without  ([nestion. 
While  deposits  ari'  e.|ual    liahilitics  of  a   hank,   no  one 
is  ever  forced  to  accept  a  di'posit   in  a   particular  hank, 
wheri'as  he  may   hi-  ofit  n   compelled   to  accept    its  tK.tes 
without    any    knowledge   of    tiic   stahilit\    of    the    hank. 
It    was   this   i-cneral   acceplancc   which    the  safetv    fund 
aimed  to  accomplish,  and  it  is  oh\  ions  that  the  <4u.araiitct 
of  notes  would  have  Ikcii  stitlicicnt.      |{y   ]SU>  this  and 
otli(r   defects    had    In    n    c(iir,(|,d    hut    the   s\  stem    had 
already  rcc<'i\r(|  its  dtath  hl.iw.      Had  the  dcd'ccts  Ih.h 
corrected   carlitr   it    is    jMohahlc    that    the   hond   deposit 
plan  wnnid  ni\<  !•  iia'-c  hct  ii  .•idMpIrd, 

The  chill'  inthiences  whi'/h  i((l  to  tlu  hond  deposit 
law  of  IH.'JH  ware  puliiical.  Cliaitf  rs  iiiidi  r  the  safetv 
tund  pian  had  hi(  n   Loaiited  laily  h\    spreial  act  of  tlu 


IllS'lOin    Oi'   HANKINC 


nei 


l('uisl;iture,  and  tlitre  was  a  pronounced  sciitiMicnt  fur 
lire  hanUin'J'.  The  \\v\\  systiin,  howcx  ti'.  ini^^lit  lia\c 
h((ii  t'stahlished  nndt'i-  the  sal'ety  t'nnd  plan  had  that 
Ikcii  workin**-  smoothly. 

i.'yJ.  Free  hdiih'iii^-  ■s//.stcin.~-'l'\H'  Vwv  Hankin<4'  Law 
aiithoi'i/ed  any  })t.'i'S()n  or  association  of  persons  to 
rn'ci\c  circnl.-itin^'  notes  to  l)e  signed  and  issued  as 
iiioiuy  who  wonhl  deposit  with  the  couijitroller  the 
stocks  oC  the  Cnited  States,  of  the  State  of  New  N'oi'k 
III'  othei'  ip[)roved  states,  or  inort<4'ages  secnred  hy  real 
estate  worth  twice  the  amount  of  the  moi'toaox'.  'I'his 
tl(  posit  of  collatei-al  was  intended  to  insure  the  note 
lioldei'  against  loss.  \o  pro\ision  for  actual  i-edemp- 
tioii  in  sj)ecie  was  ri'ipiired.  Anyone  wjio  j)ossessed 
the  necessary  securities  uii^ht  enter  the  ha.nkinn'  husi- 
iitss.  and  it  is  e\ident  that  many  of  them  did.  ()\cr  \'M 
Ml  w  haidcs  w(i"e  orn'ani/ed  before  IHM).  I'ailures 
i|iiickly  resulted,  and  it  was  found  that  in  many  cases 
tli(  securities  de]tosited  weit  not  sutlicieut  to  meet  the 
ni)t(  s.  Heal  estate  iiiort^a^es.  howe\(  i  \  aluahle.  wi're 
iMii  (|uick  assets,  heuce  the  law  was  tiually  chanyed  so 
that  only  the  stocks  of  the  I'nited  .States  and  of'  New 
^  iii'k  were  a\ailal)le  for  deposit. 

The  notes  cii-culated  at  first  at  considerahle  discount 
liiil  this  was  o\(r(dnie  to  a  certain  extt  nt  in  ISK)  hv 
.III  amendmer.t  to  tin'  law  \' hich  necessitated  redenip- 
tmii  of  the  notes  of'  itderior  hanks  in  New  ^'(ll■k  and 
.\lli;ni\  at  a  discdimt  not  yreater  than  onedialf  of  i  pi  r 
11  lit.  This,  howe\(i-.  >4a\c  an  advanlaLif  to  the  cdiui- 
ti\  hanker  hecause  ol  the  profit  he  could  make  li\  loan- 
\iiiX  his  uoles  at  j»ai'  and  I'edeemnii^  them  at  a  discoinit. 
Hence  many   persons  iti   the  cities  issued   tlu  ii'  notes  in 

till-    rw  >iiiif  r\'    towns  I'ne    nllslnl'.v^s    iit     tiicv/'    li-iiil.^    »\  mc 


U  Iv  U)  issue  notes. 


r 


ley  had  no  pirmaiiint  hanking 


;jfi^ 


M()M:V   AM)   HA\KI.\(. 


f 


I 


i  ' 


!i 


houses,  and  irceivcd  no  deposits.  In  IHil  lis  condi- 
tioii  was  soniculiat  bettered  hy  a  law  re({uii-iiiM-  hanks 
of  issue  to  become  banks  of  deposit  as  well,  but  it  was 
never  earefully  enforced.  Tiic  edfeet  of  these  varimis 
ainendmenls.  jiowever.  and  ol'  the  constitution  of  is.'ji; 
was  to  improve  yreatly  the  condition  of  the  issuing' 
banks,  so  that  failures  after  1  S.K)  were  infre(juent  and 
in  almost  all  cases  the  notes  were  redeemed  at  \rd\\ 
After  18(iU  there  weix-  no  failures  which  resulted  in 
loss  to  note  holdei's. 

This  system  was  co])ie(l  by  Illinois.  Indiana,  and  \Vis- 
consin  but  with  disastrous  I'esrdts.  In  none  of  tluse 
states  did  the  system  siu'vive  lon^-  (.nou^h  to  becoiiu' 
])erfecte(l.  In  Illinois  particularly  a  lar<^e  amount  of 
the  securities  deposited  were  those  of  the  Southern 
States,  which  l)e(  ame  valueless  at  the  outbreak  of  llic 
war.  The  bank  currency  circulated  at  ^r'^at  disccuiits. 
varyin^j!'  \^idi  the  reputation  of  the  issuin*^-  bank,  in 
1H.")7  Iherc  wire  112  banks  in  Illinois:  in  18(11  ouly  7. 
and  tin  nott'  holders  had  realized  less  tiian  40  cents  on 
the  dollar. 

The  oidy  advaiita^^-e  of  this  system  over  that  of  tin 
safely    fund    is   security,  which    was   pi'owd    b\-    the  e\- 
|)erieMcc  of  New  \ ovk  after  the  list  of  acceptable  stiu'ks 
had  bi'cn  i-esti'ictcd  to  those  of  the  (  'nitcd  States  and  nl 
X(  \\     \  ork.      No  cui'ieiicy   could    be   nH)re   secure,   thai 
is.    more   ccriain   of   ultimate    red(  ui|)t  ion.      This,    how 
ever,  is  rml   tlu'  only  desideratum  of  a  credit  cuir-enev 
(urrt  (il  redi  nipliou  is  as  Important  as  idlimale  ?-edein|> 
tion.  and  in  Ibis  the  system  is  defective.       Moreoxer,  tin 
system   was  rii^id      when  the  binks  deposited  secui'itie>> 
they  were  ^i\en  the  i  i^ht   |n  issue  so  mauv  notes,  ami 

thl'V  could    not    Issue  .'iddlt  !ori;d.    '!  >!!e>U>  >! -.   >><>   >!!.'>ne!'   <.<.!>:!! 
till'   n(  ((Is   of   busiuess   mi^-ht    be.       hi   oilier   woi'ds.    tin 


iiisroin  oi    ir\\KiN(, 


am 


s\nI(Iii  \v;is  iiulastic,  ;in  nttrilmt''  wliicli  aloiin'  with  that 
lit  Mcurily  it  Iiaiuled  down  to  oiii'  ])r(Sfnt  ('urix'iicy 
s\st(iii  and  against  wliich  most  of  tin  attai-ks  of  to-day 
aif  dirt'ctcd. 

[.y.i.   I'!.r/)(  rit  iici'    ill    (ithcr    slnh's. — Tlic    liistoi-y    ot' 

i,;itil\S  III  which  the  xai'ioiis  states  wci'c  jiart  ownci's  was. 

ill  the  main,  (hsastroiis.      IvcntiicUx'  tricil  the  (  xpci'iiiKiit 

\\\    ISOC   and    a,L!'ain    in    1S2().      Ahdiama    in    IS'JO    snh- 

Miihfd     two-lii'lhs     of   th(-     capital     oi'     the     Hank     oi' 

Aiiliama.    issuini.';    bonds    in    i)a\iiiciit.     'I'lic    oriuinal 

l^^t^i(•tions   on    loans   \\('re   ample   hui    tliiy    wci'c   con- 

-tniitly  \  iojatcd.      Loans  wxvv  tVccly  made  to  memhers 

dl'  tliL"   le^islatiu'c  and   tlicii-   fiieiids.   and   in    ten   years 

tli(    disconnts  increased    iVom   S,)()(».()0()  to  S-jO.ooo.ooo. 

fill    panic  of  I  H.'}7  found  a  la!\ne  auiount  o|'  these  loans 

wMidiless.  and   coutidence   in   the  notes  disappeaivd.   to 

Ih     follov'-ed    hy    a    period    of    business   sta!4'natioti.      In 

ist.*)  the  chai'ter  expired  and   was  not    rencwecf      Mis- 

NisMppi.  Ai'kansas,   1-dorida.  and   Louisiana  had  similar 

( Apt  |-ii'nces.      The  I   iiion  liank  of  Louisiana  was  estali- 

li-iM  (1  in   IH.'}-J  with  a  capital  of  S?. (»()().(»()()  laised  by  a 

■  i!'    ot'  state  bonds.      It  failed  ten  yeais  later,  and  was 

!'i|!ii\\cd   by   the  establishment    of  |)ri\ale   banks  undei- 

M'Miid   laws.      Missouri's  e\pcri(tice   was   not   so  calam- 

ilmis.  althou/^ii  the  Hank  of  Missouri  w  is  ne\cr  a  n'l'eat 

Mireess.      The    state's    connection    with    it    was    sexcred 

11   iSdti. 

i."it-.  Iiidiiiiifi  (111(1  Ohio.  '\'\\r  Hank  of  hidiana  was 
til'  most  successful.  It  w  as  ineoi  pnrnted  m  |  ,s:{  |  with  a 
.:ipital  of  SI.COO.OOO.  one-lia!l'  ol  whii'li  was  siibsciibi  d 
i>\  die  state.  It  \wis  ;4i\  en  a  uioiiupdU  of  banking;  in  the 
st.itc  and  the  riLiiit   to  e^iabhsh  iMancJies.      |'',a<'li  bi-ancli 

II     II      I  .1  . : :  1     I       .111 


%\ 


i.l 


i'  - 


'*!.! 


,  I   1  M    '  I    «  »    'I 


I  I     » I  t  I  •  I     I  »  i  v"     iSSi  iC    »  i  '      i  ii  M  V    'I     \"\  (i  S 

f(    lrii'U'<l   t<»  :\\\   ;i!iiiMi!il    \ -w-r  as   ^^Tcat   as   llic  cMiMtil. 


;}(i4 


M()\i:^'    AM)   IJANKlXd 


m 


Kacli  hi'aiK'h  hauls  was  iT(|iiiix(j  to  ;icc('|it  l!;c  notes  n| 
other  hraiich<s  at  pai-  and  to  iTdccni  its  own  notes  in 
specie.  Dni'ino'  the  first  years  of  its  existence  it  at- 
tenii)te(l  to  loan  on  ival  estate  seenrity.  hut  the  (huinrrnl 
this  ensto/n  \\as  soon  reah/ed  and  it  was  dlseont  inind. 
Siihse(iuently  it  loaned  to  farnier^  on  tlieii-  jx  I'sonal  notes 
and  on  their  ei-ops.  hut  the  loans  wvvv  alwavs  for  shoit 
])eriods.  In  this  way  it  transacted  husiness  on  souiui 
i)ankino'  pi-inciples  and  continued  to  ihrixc  until  ISC.-). 
when  the  federal  tax  on  stale  hank  note  issues  forced 
it  out  of  existence. 

Tile  State  Hank  of  Ohio  was  likewise  well  uianaoed 
and  Jiiuhly  successfid.  It  had  a  capital  of  s:{..'{()0.(i()(i 
and  thirty-six  l)ranches.  Note  issue  was  restricted  to 
an  ainoiHit  not  oreater  than  twice  the  cai)ital.  and  was 
I'urther  safe-^uai-ded  hy  a  safety  fund  of  10  ])er  cent 
deposited  with  a  hoard  of  eonti-ol.  It  passed  out  m 
existence  with  tlic  expiration  of  its  cli;!rtei-  in  iStlC. 

The  slate  l)anks.  as  a  rule,  did  not  fail  for  the  sanic 
reason  that  caused  the  downfall  of  the  two  I'nitnl 
States  hanks.  Whih  in  some  instances,  notahly  in 
Kentucky  and  Alal)ania.  the  lianks  hit-anie  in\(>l\cd  in 
polities,  their  failure  was  u-enerally  due  to  defects  d 
or^ani/ation  and  niaiiayeiiient. 


ft 


V\ 


i., 


If 


CIIArTEll    XXV 

NATIONAL  BANKING  SYSTEM* 

I.").").  '/'//(•  XdtioiKtl  Bank  Act.  'l\\v  cstaljlislinieiit  :)t' 
;iic  iiniioii.tl  haiikiiin-  system  was  the  result  of  the  un- 
siitist';{ct()i'\  liiianeial  coiKh'tioiis  which  ohtained  (liii-iii<) 
tl''  ('i\  I!  War.  The  enri'eiiev  ni'  the  eouiitry  was  eoiii- 
j)ovc(i  hir<^X'ly  of  the  notes  of  over  1, .'>()()  state  hanks. 
.-!  lai'yc  amount  of  whieli  was  worthless  and  almost  all 
I  \Uiieh  eireulated  oidy  at  a  (hseonnt  wIumi  it  was  at  a 
ii^lanee  from  its  place  of  redemption.  In  addition  to 
(Ills  ein-rencv  troul)le  the  fiscal  situation  oi'  the  o-overn- 
i.'itiit  was  unsatisfactory.  It  had  heen  forced  hecause 
cf  tile  ahseiiee  of  a  market  for  its  iionds  to  raisi.'  moiiev 
ii\  ilie  issue  of  leu'al  tendei'  notes.  These  notes,  not 
Ik  iii<i'  redeemed.  im])aired  the  credit  of  the  ^•overnment. 
t'iiMsc(jiiently  it  was  anxious  if  j)o.vsihle  to  strengthen 
tlir  market  for  honds.  Secretai'y  Chase's  plan  foi-  the 
c^talilishment  of  the  national  hanking'  system  com- 
iiK  iidi'd  itself  hecause  it  would  correct  in  a  nuasiu'c  hoth 
"f  llicse  ills,  in  Secretary  Chase's  words  the  pi'iiicipai 
fr;i(ui'es  of  the  \Ai\]\  wei'c: 

I'ir^t.  ,'i  rifciilution  of  imtc^  li'  ariii^  a  coniiiioii  i!nprr".v|<>n.  iiiul 
tUlHiciif  irati  ( i  !)v  ;i  I'oiiiiiKiii  aiil  linni  \  ;  ^i('(ui(l,  tlir  rrdrnijif  inn  of 
tli('s(>  ii(itr>  1)\  the  a^-(U'iation>  aiui  m^titutioii^  In  \vlilch  llicv  niav 
ill' (Irin  I  rid  for  i>>ur.  and,  iliiiil.  the  .-ccuntx  of  lliat  n  (Icmnt  ion 
liv    till'    pli'd^'c   of    1   nitrd    Statr^    stocks,   and   an    adniuali     pro- 

'  ■  Mn    of    -  MCI'K   . 

In  tlii-   pl.m   the  pi  oplr   in   llicir  ordinary   iiu^inc^^   uonld   tind 
til''    id\anta;;(^  ol"  unil'inniil  \    in  cnrri  nc\  ;  of  iitnt'oi'init  \    in  se- 
i  >   .  oi    ciiriinai   --a  i '  :,;iia  i  i  i.   li    riinii!:!   >al  fj,;ilar(i    i>    no>».it)ii_', 
■  lii'.v  Ft"l  lal  i{i'-.(r\.'  All  in  ApiKUilix. 

365 


ii!* 


h' 


III! 


'i(]{i 


•l!4'.lili^t     lit 


AfOMV   AM)   1{.\\KI\(; 


lipnriati,,,,.  ,.,|m1  uC  prot.rf  I,.ii  fnnii  Iu.>r,  ii,  dixT.nnts 
ami  ,  Ncl,;,,!-,--:  ulnl,.  l,,  fl,,.  ,,,HrMt  I,mi^  of  flic  (iovmnrn'rit.  tlio 
I'"..,, I,.  u,,„!,l  fiiul  tl,r  nirllHT  ;„lvanta-.vs  ..j'  ,-i  laiir,.  ,K„,an.l  for 
;4n\rin,,iMit  Mvunlic,,.  and  of  incivas-.l  facilities  for  ohtainin- 
IJk   loan-  n  i|nirv(l  liv  the  \^nr. 

^  t.)<;.  MarLcl  /.,/■  ri/ilcd  ShiUs  Ixnids.  'Ihv  rind 
I'eahirc  of  fl,,  piaii  uas  the  rc(iuir(HK'nt  tliat  all  hanks 
\vhich  <l<  sired  t.)  iiiforporate  under  the  national  name 
should  huy  o<,verniiient  honds.  (lei)osit  them  with  the 
'i'reasury  and  j-eeei\  e  eireulatino-  notes  to  the  amount  of 
'■»<>  IKT  cent  of  their  hon.l  deposit.  Thus  these  notes 
"ould  l)e  unirorm  heeause  they  were  all  to  he  printed 
hy  the  government:  and  they  would  always  he  seeurc 
heeause  the  deposited  honds  wvvv  pledo-ed"  to  tlieir  re- 
•Icmi-iion.  l-'urthermore.  a  new  demand  Tor  n;nyvvu- 
ment  honds  would  result  whieli  would  greatly  I'aeilitatc 
the  nation  s  hori'owino-  power, 

(•.";7.   J'Jarffi  liisinru  ,,f  I  he  r/e/.~This  i)]an  was  reeoiii- 
nundid  hy  See-etary  Chase  as  early  as  IHCI  l)ut  it  wa , 
nut  until  l.S(;;j  that  it  heeame  a  law.      It  did  not.  how- 
t.\cr.  result  in  as  or.al  a  henetit  to  the  national  finanecs 
i:s  had  heen  expected.      'I'here  was  a  decided  i)rejudiee 
.(.^ainst    the   issue   of   notes   secured    hy    the   deposit  of 
honds.  the  result  (.C  the  laHiu-e  of  Ihe  several  state  svs- 
tems   uhich  o.H  rated   on   that   plan.      Furthermore,   the 
original  act  was  del\cti\f  m  many  respects.      'Die  state 
l)anks.  a  majority  ot  which  had  heen  e.\i)ected  to  incor- 
l)orate  under  the  new  law.  did  not   do  so  in  any   lar.oc 
iiumhers:  l!,<,rlore  there  was  no  great  demand  for  gov- 
ernment   !"i!|(|s. 

In  IS(H  the  law  was  amended  making  the  conditions 
of  iruori)orati.,n  somewhat  more  attractive,  hut  it  was 
not  unid  ISO.-,,  wlun  a  law  was  passed  providinu'  for  a 
tax  ol    1(1  per  cent   on  ;d|  notes  issued  hv  slate  hank-, 


\i\ 


NA'iioNAL  B.\xi\i\(;  s^s■l■I,^r 


rccdiii- 
it  \\;i , 
.  how- 

judicc 
)sit  of 
te  svs- 

T.     the 

■  state 

inciir- 

!;ii-l;c 


iitidiis 
i  \\;!s 
for  ;i 


tit.it  (•(tdvcrsioii  of  state  into  national  hanks  bccanie 
-1  IK  lal.  IJy  tliis  jM-oN  ision  all  slate  hanks  which  wished 
1(1  list'  notes  wei-e  I'oi-ced  into  the  new  system.  Thus  the 
(itiiiand  for  honds  did  not  eonie  until  the  war  was  over 
ami  tlu'  neeessily  of  their  innncdiate  sale  had  disap- 
iKai'ed. 

Tliis  national  hank  law.  its  o|)erations  i)erl'ected  hy 
\aii<iiis  anieiidments  in  IST-t,  1H7").  and  1H82.  hecanic 
till  haekhoiie  of  the  American  hankin^-  system.  Its 
])ni\isions.  therefore,  in  their  final  form,  arc  worthy  of 
caicl'ul  attention. 

I.")H.  Comptroller  of  tl/c  ciirrciic//. — Control  of  the 
national  ha?ikino-  system  was  vested  in  a  hureau  of 
IIm  I'nited  States  Treasury  under  the  direction  of  the 
cniiiptroHer  of  the  currency.  It  was  the  function  of  this 
(l(  partment  to  supci'vise  the  issue  and  redemption  of 
iH'trs.  the  orantin^'  of  charters,  etc..  and  to  enforce  all 
till  various  provisions  of  the  law.  To  accom])lish  this 
(11(1.  examiners  wire  api)ointed  hy  the  comptroller, 
uliose  duty  it  was  to  examine  from  time  to  time  the 
affairs  of  each  hank  in  the  system.  These  examina- 
tions were  made  at  any  time  the  comptroller  selected, 
aii'l  '.vithout  i)revious  notice  to  the  hank.  The  examiner 
had  access  to  all  the  hof)ks  and  accounts  of  the  hank, 
and  was  rc(]uired  to  make  a  thorou^^h  itnesti^ation  of 
ill  the  loans  outstanding.  This  examination  was  re- 
t'(ati(|  in  detail  to  the  c()m])trollcr  who  called  the  hank 
to  account  for  any  illegal  |;iactices  or  situations  which 
might  exist.  Once  a  year  the  comjjtroller  made  a  report 
(o  ('f)ngrcss  showing  tho  condition  of  the  I'anks  in  detail. 
In  case  of  the  failure  of  a  hank  the  comptroller  ap- 
pointed a  receiver. 

l.){).  S It w warn    of    7\(itioii(tl    Bunk    ./C/.— Charters 
Were  granted  for  periods  not  longer  than  twenty  vears. 


i: 


4 


in-n 


368 


M<'M:Y  AM)  15ANKl.\(i 


k 


U 


Si    ' 

[i  I ' 


?',' 


Ai)])licatinii  iiiust  he  made  by  not  I'cwcr  tlian  five  ))cr- 
soiis,  i\itli  uliosc  >^()(h\  character  tlu'  coiiiplroUcr  must 
!»(,•  satisfied.  T'if'ty  |)er  eetit  of  the  eai)ital  must  Ik-  j)ai(l 
ill  hel'ore  the  hank  ecuhl  open.  aii<l  the  remainder  within 
six  months.  Tlie  niinimum  eapital  for  eities  ol'  .'i.ddo 
po|)uhition  or  hss  was  S'J.). ()()(»:  for  eities  hitween  .'{.Odo 
and  (;.()(){).  S.IO.OOO:  for  those  hetwee.i  (),()()(>  and 
.-)().()()().  sioo.OOO:  and   for  th(»se  greater  tlian     -lO.OOO, 

IvK'h  hank  must  ha\e  a  hoard  oi'  directors  of  not  less 
than  five  memhers,  eaeh  of  w  Iioni  must  own  ten  shares 
of  stock.  The  stockhohlers  were  in(h\i(hially  hahle  for 
all  ohl'o'atioiis  of  the  l»ank  up  to  an  amount  ef]ual  to 
their  holding's  of  stock.  In  case  of  failure  they  could 
i»e  assessed  to  pay  de])osits. 

'I'he  technical  powers  of  national  iiaiiks  ha\e  already 
heen  considered.  Hrietly  they  wei-e:  (1)  To  receive 
de])osIts.  (2)  issue  notes.  ( .'} )  loan  credit  on  personal 
security,  and  (  ti  discount  notes  and  other  evidences  of 
debt.  A  hank  mij^ht  own  only  such  n  A  estate  as  was 
necessary  for  conducting  its  business  and  as  came  into 
its  possession  in  settlement  of  ]>i'e\'iously  contracted 
debts.  In  the  latter  ease  it  must  lu-  sold  withiji  li\'i 
years.  The  bank  ecuhl  not  loan  more  than  one-tenth  of 
its  ca])ital  and  suri)lus  to  one  individual  or  cor])oration. 

Hefore  a  national  bank  could  open  it  must  deposit 
with  till-  Fnited  States  'l'reasu>-y  a  cei'tain  amount  of 
U'overnmeiit  bonds.  This  amount  Aaricd  with  the  ca])i- 
tall/ation  of  the  bank,  l-'oi-  banks  with  a  capital  of 
$•200. ()()()  or  less,  the  j'eijuii-ement  was  one-!'ourth  of  its 
capital:  for  those  over  S-JOO.OOO  it  was  S.io.OOO.  This 
amount  must  be  deposited  re<4ardiess  of  whether  the 
liank  expected  to  issue  notes.  It  was  entitled,  however. 
if  it  so  desired,  to  receive  froivi  the  comptroller  circulat- 


XATIUNAL  ]1ANK1.\G  SVSTKM 


369 


=     ii\ 


iim  notes  ccjual  in  ainotiiil  to  the  pai-  value  of  tlic  df- 
|iM>ik(l  l)oii(ls.  These  notes  weie  "reeeixahle  at  par  in 
;ill  parts  ol'  the  I'nited  States  in  payment  of  all  taxes 
and  exeises,  and  all  other  dues  to  the  I'nited  States 
(  \cei)t  duties  on  imports;  and  also  tor  all  salai'ies  and 
ntliir  debts  and  demands  owiny  hy  the  I'nited  States 
In  individuals.  e()r})orati()ns  and  assoeiations  within  the 
I  iiilcd  States  exeept  interest  on  tlie  puhlie  deht.  "  Tlii'y 
wn'e  also  le^al  tender  in  payment  ol'  any  debts  to 
national  hanks. 

ft'>().  Circiildtiii;/  notes.- — The  notes  nnist  he  redeemed 
(in  demand  in  lawful  nioney  at  the  eounter  of  the  issu- 
ini;  i)aid<:  and  to  fui'thei-  faeilitate  re(lemj)tion  each  hank 
\\a>>  re(|uire(l  to  deposit  witli  the  'I'leasui'y  an  amount 
( i|iial  to  .)  per  eent  of  its  outstanding'  eireulation.  When 
ndtcs  were  presented  to  the  <i'oveinment  they  wei'e  re- 
(ircined  out  of  this  fund.  Ciix-ulation  mi<^ht  he  retired 
liv  i'e(leemin<i,'  the  notes  over  the  hank's  eountei-  and 
sn:(lin<4'  them  to  Wn'-'  Miy'ton  for  eaneellation,  or  hy  de- 
pDMfin^  money  to  .  ecjual  amount  in  the  Treasury. 
Til  deposited  bonds  were  then  I'edeemed.  The  law 
Kstiieted  redem})tion.  howe\  er.  by  pi-()vi(lin,i>-  that  not 
tiinie  than  $0.0()().()()()  ol'  national  bank  notes  must  be 
rt  tired  in  any  one  month.  The  notes  were  subject  to 
ta\afion  by  the  ^oveiiiment.  When  they  were  secured 
liy  the  2  per  cent  bonds,  the  banks  nnist  pay  one-half  of 
I  per  cent  annually  on  the  average  circulation:  when 
stciired  by  higher  rate  bonds  the  tax  was  1  per  cent 
iinnMally.  'I'jie  expense  of  redem))t!on  was  also  l)ornc 
lie  banks.  It  is  estimated  that  it  amounted  to  about 
"'''•■{  for  each  $1  ()().()()()  of  ciiculation. 

There  were  in  1!M)'.).  ('»,«<*:{  national  banks,  with  a 
ti'i.il  note  circulation  of  •S<;4H. ()!)(•. 2 10.  To  secure  this 
*; (Illation  the  baid<s  had  purchased  and  deposited  with 

VII  -il 


370 


MoM;^    AM)  I5ANKIN(; 


I 


1^ 


tlif  Treasury  .S(;4l>..'{H!).r)l()  of  <>()veriiiiicnt  bonds.  A 
majority  of  tlitsr  bonds  ijorc  only  2  ])tr  cent  inttr(st, 
the  lowest  rate  paid  by  any  nation  in  the  worhl.  Tims 
the  predietion  tliat  the  hiw  wouhl  ereate  a  market  for 
government  bonds  has  been  fulfilled.  The  sreond  reasdn 
for  its  adoption — that  it  would  provide  a  uini'orm  cur- 
reney — has  likewise  been  aeeom|)lishe(l.  for  national 
bank  notes  have  always  eireulated  freely  and  withoiil 
diseount.  The  note  of  the  Maine  bank  was  e<|ually 
aeeej)table  in  California  as  that  of  the  San  Franei^co 
bank. 

The  danger  of  the  system  lay  in  the  priee  that  was 
])aid  for  these  benefits.  In  making  the  eurrcncy  stable 
and  uniform  it  was  made  inflexible:  and  in  re(|uiriii^ 
a  <ie|)(  it  of  government  bonds  a  system  was  founded 
whieh  neeessitated  a  eontinuanee  of  the  national  debt. 

4()1,  licscrvc  rcf/iiircmnit.s  of  ihc  Xatioitnl  Hank 
.tct. —  i\ll  banks  were  rerjuired  to  keep  a  certain  amount 
(.'f  lawful  money  on  hand  as  reserve.  l?i  Xew  York. 
Chicago,  and  St.  Louis — designated  central  reserve 
cities— this  amount  was  2.5  per  cent  of  the  deposits.  In 
certain  other  cities,  called  reserve  cities,  the  amouiit  w;is 
2.5  per  cent,  but  one-hal  f  of  this  migjit  consist  of  demand 
deposits  in  Xew  ^'ork.  Chicago,  or  St.  Louis.  All  other 
banks  must  kec])  a  reserve  of  1.5  per  cent,  three-fifths 
of  which  nnght  be  de])osited  in  the  reserve  cities.  The 
.5  i)er  cent  redem])tion  fund  might  be  counted  as  a  part 
of  the  reser\c.  'I'he  enfoi'cement  of  this  i-i'serve  ])ro\i- 
sion  was  a  duty  of  the  bank  examiner  and  the  comp- 
troller. 


m 


C  IIAPTKH  XXVI 

I'Hl.SI.NT  { ONDCl'IONS  OK    M.WklVd    IV   THK   rVI'i'ED 

STATi:S 

li'.'J.  The  (Urt'lopnioii  of  bditk  dcixisit  ciirrnir//. — 
llir  history  ()('  l);uikiiiu'  in  the  Cnited  States  siiiee 
tlir  (  stahhshmenl  of  the  national  haiikiii<r  system  and 
tlu  att''ii(huit  restrictions  upon  note  issue  hv  the  state 
I'.iiiks.  deals  ehietly  with  the  (leveloj)iiient  r)f'  tile  deposit 
liinction.  The  Coliowin^r  table  shows  the  inerease  of 
(|i  posits  relative  to  capital  and  note  issues  in  Idl'.i  coni- 
\<;tvvi\  with  IHG,"): 

lH(i5.  lid:?. 

D-llars.  Dollar.-,. 

<   .i|.il.il,  ~u^|liu^  ;in.|  iiiidix  idc  il  prnlit-.  .  .  At.'!  l.!)(ll  1.(1(11 1        si.(lt,j,()(i'(  ,.5  Ifi 
l''-l'">it> j  I!).  100.(1(1(1  ,;,!).);5.t(>l..V.l 

Niitcs 171,()()(),o()o  7ii.\i:,,u-Zi 

W  liile  national  hanks  had  inncased  four  aii<l  one- 
li.ill'  times  in  nuiiihtr,  the  capital  and  surplus  nearlv  tive 
iiiiKs.  and  the  noh  s  over  four  times,  the  deposits  had 
iiivicased  over  tenfold.  In  addition  to  this,  moreover. 
liiiist  he  counted  the  ><.S. 000. ()()().()()()  of  dci)osits  in  state 
''.inks  which  issued  no  nous  whatever, 

W'v  have  seen  that  this  deposit  system  <4a\e  rise  to  the 
most  perfect  cui'reney  known,  a  eurrincy  which  ])er- 
tiiinis  a  vast  amount  of  money  work  at  a  minimum  cost 
.111(1  which  exi)aii(ls  and  contracts  duriiiu  ordinarv  times 
Hilh  the  \ai'yino'  needs  of  l)usiness.  To  this  function 
tli(  naiional  hanking  law  eomplctdy  suIk  .dinated  the 
i^siR'  of  notes. 


It   j>iin-   >w.  ..--.n   4-,. 


,  J  ,,....  i, 

;{7i 


I ' 


-fi  1  I  I  I  Kt  I    II   V 


KV  'f . 


'''-  .AIOMA    AM)   H.WKINC; 

and  (lifffrciicc   between   notes  and   (iej/osits.      Hotli  are 
(leiiiand    ohiioations    of    the    hank.      The    (hirerenee    is 
ehiefiy   one   of    form   whieh    oiv,s    to   the   note    oRattr 
aeeeptahihly    hteanse    (.f    its    nni  rorniity.       Tlie    person 
who  aeeepts  the  hank  note  rehes  entirely  npon  the  sta- 
hdity   of   the    hank,   whereas   one    who   aeeei>ts   a   cheek 
rehVs    npon    the    personal    ercdit    of    the    maker.      The 
eonrts   jiave   held    that    the   tender   of   a   cheek   does    not 
eonstitnl.'  payinetit  nntil  the  cheek  Itself  is  redeemed  at 
the    hank.    pro\  ich'd    redemption    i^    re(|nestea    within    a 
reasonahle  time.      It  is  ol)\  ions,  therefore,  that  the  ru.te 
l)erforms  a  fmietion  which  the  deposit  eamiot  i>erforni. 
namely,  eircniation  heyond  the  repntation  of  tlu' oriuinal 
holder  oi'  thi'  hank  cre.lii. 

U\:i.    Liniil'ilinii     nf     ,lt  i,n.sil     r//m'//r//.--Tliere     are 
])arts  (,f  the  conntry.  particniarly  the  nn-al  districts  iA 
th.    Sonth  an. I   West,  where  hankinw^  facilities  are  poor 
and  where  they  ninsf   nse  -ither  notes  or  actnal  money. 
Furthermore,  at  certain  times  o!'  the  year  their  demaiid 
for  enrreney  of   ,,ne   form   or  another   incixases.      It    is 
ohvionsjy   p.,.)r  economy   to   force    these  districts   to  nse 
,U«>ld  in  their  hand-to-hand  transactions  wluri  tliat  ,ii.ild 
ean  perform  three  tinus  the  mone  \    w.,ik  if  h<ld  in  hank 
reserves  as  a   hasis   for  tht    deposit   enrreney.      Whereas 
lli«'  depe.sit   eairreticy   will   expanei   te.   meet    the'  s.asnna! 
inearases    .f  l.nsir.ess  in  the  tinaneial  centers,  it  ejoes  not 
■•""I  1"  any  way  the'  rural  eoiiimnnitv    which  iieieis  men-, 
actual    money.       I-',,,-    (his,    if    \ny    ,,<,   ..tiier    reas.ui.    (1. 
suhor.linatie.n  ..f  !h<'  nol.^  issne'   fnne-C.n  has  pr.x,ntM| 
flu   .urcate.st  eeeineimy  in  liaiikiri^-. 

The  ^n-cal  danger  nf  sne'h  a  sy^t, m.  however.  lay  in 
liie  reserve  reeiuireiiie nls  anel  e-nste)ms.  All  l)anks  were 
permitted  to  keep  a  pe.rli.m  e.f  llicir  reserve  ..n  elepe.sil 
ui  reserve  eiiy  hanks.     Tins  permissie.n  was  ine-,.ipe.raf  e  el 


I'HKSKXT  (OXDITfoX,.  ,»F  l^WKIXd  37;] 

'-''; 'I'Hau- with  the  i.l.a  c,l\.n..,I,linn.  ti,,  .oMMlrv  hanker 
'"  kcq.  w.lhout  exiK-nsr  a  city  acru.n.t  as  a  hasis  for 
-H-a.i^iV.  A  luMher  .vason  uas  t„  .ncrcase  the  ,„„- 
"'">■  "'  l-anahh.  IuihIs  hy  enahhn-  the  eitv  hanker  to 
1"^"'  I"  tl'"  larne  ecnters  the  .leposit.  of  the  eountrv 
"ank.  Ihese  needs  eontinncl  to  exist  Iron,  vear  t'o 
><■<•"•.  hnt  the  h,anit!u  hy  thr  city  hanker  of  th.'  eonntrv 
I'anker  s  ,|,j,os,ts  was  s..  oreatly  ahusc.l  that  its  (hm-vr's 
fHeanir  as  oi^al   as  its  hrtietits.  " 

UH.  SrasoNa/  <icmu„ds.      This  ahusr   ha.l   its  orh-in 
"I   th.-  enston,   nf   thr  n.n.itry   hanks   of  deposit  in-.",,, 
''"•"'^•'■'I  ecnters  n..t  only  .,  portion  of  their  reserve, lu-- 
in^-  eertain  seasons  o|    the  vear  hut  a  h.r.v  a.no.u.t  of 
•■"''''♦""i--'l    eash.      Sin(v    eon.iu  tit  i.,n    hetwee.i    the    eitv 
"ajiks   r,snite<l   in   the   payment   of  i,;terest   on  eonntrv 
''••'l;nie(s.  fh.'se  deposits  must  h,    h,aned  o,it.     And  since 
lliry  were  .hiiian<l  dep,,sits  th.  v  must  he  loaned  on  de- 
'"•■""'<>'■  '•■•'II-     As  the  only  liehl  lor  this  sort  of  loan  is 
"'  "'•■  ^*'"'^  '"•"■l^"^-  »•'*■  |""n.olH.n  of  sp<enlation  was 
""■  '■'"•'    '"'iction  of  these  e.MHitry   halanees. 

^^''""    ""    ■'•■'"and    \\n-   h.atis  a's   well    as    for  aetnal 
'••i'"i'y  inereased  in  the  country,  as  ,t  invanahlv  does  in 
•I';     l.dc    siniiMMr.    thes,.   deposits    w,-re    withdrawn    a.,d 
'l"l""<iilsn|  ciirnney  re.(ues|rd.    Loans  must  he  sharply 
''""''■'"•'*''    '"   ♦'"•   'i".-'neial    .vnters.      Thr  <lep,,sit    cur- 
rency enuld  not  mr.l   Ih.    n.rd  heeause  Ih,.  ,h  ni.nd  was 
'"'•;>  eirculatinnnir,|iiininfn,.nrral  aeeeptahiht v.    If,  r,. 
^^■•'sa  .l,„,and.  th,r,  loiv.  that  iin.ler  a  svst,  ni  .d' elastic 
'i<»te  issu,    ,,.u|,|  hr  linan,',,|  w,tli,.ut   shipni,„t  ,.f  i,n,ld, 
a  conscciu,  lit  ,1,  phlM.n  of  r,  s,  r\ ,  s  an.l  ,'allin.j  ,.f  |,Tans. 
Perhaps  it    is  u.||    t|,,,t    ,,nd,  r  th,-  svst,  111  ,,f  r,s,,v,i 
'I'P'.Mts  th.iv  was  lhis,-h,,k  up,.n  speculation,  hut   the 


1 1 1 1 1    I  ^ 


)   I   I  V      I   I  ,        \   t  \ 


•y  (•naiiiuiL;  iii,  eountrv 
I'ank,  r  to  increase  his  ,,un  ,-urr,  ii,-y  supply,  uijl  hsseii 


Mi 

'4 


.'571 


MONEY  AXn  BAXKIXC 


''J 


the  necessity  of  kcepin-  easi,  l.alanees  in  the  cities.  Tliiv 
\^<'"l<i  increase  his  purchases  „r  con.rncrcial  paper  with 
iunds  diverted   Crom  the  stock  market. 

4<5.-,.   Drp/rlion   of  /e.srnr.v.— This  danuer  „(■  deple- 
'""'"'  '•^■^^■'■^^•^  ^^''-'""-t  acute  i„(i„K.s„r  panic.    There 
ua.s  tlien  a  -eneral  .lernand  lor  h(|uidati()n  of  all  credits 
"■cl.Hlin.L;   these    .lepoMt    crc.lits.      liank   -runs"  are  de- 
I7''^'l  '•>   '•'"  '•••".kers.  yet  ,t  is  the  countrv  hanks  then.- 
•sdves  uhich  ucre  the  first  to  uithdraw  deposits.      Kach 
''ank  was  anxious  to  increase  the  cash  reserve  in  its  own 
vanlts.  and   tins  could   he  done  onlv  at  the  expense  oi' 
v-n.e  other  hank.     As  reserves  were  depicted,  loans  n.ust 
'KM-a  le<l.  and  the  ioaninu'  power  <,('  the  hanks  was  sadiv 
mpplcd  at   a   time  when   it    was   .;reatlv   needed.      Wit), 
the  call, no  of  loans  can.e  lallinL-'    „  ices,  and  if  horrowers 
cannot   horrow   they   must    sell    .heir   property   at    ..,,,,, 
-aerdu-e.      It    would   not   he  the    function  ..f  hank   notes 
t'-    prevent     laihuvs    of    concerns    which    were    ovca- 
♦^"•'^■•'  ^""1  "nheaithy.  hut   the  issue  of  true  hank  note. 
•;"  ^'leh  lime  s  woulel  save  many  solvent  firms  temporarilv 

I"    need   of    finiels, 

Tl.is  with.lra-.al  -'f  <!<  posits  h.ra.ne.  so  ..neral  holh 
""  f'c  part  <.f  the  iu.lix , dual  an.l  the.  ..ountrv  hank  that 
''"'■'"-••'  P''"'"'tli<city  hanks  loun.l  th.nise'lus  fe.nr.l 
'"  '■*'"^"'  ""  payment  of  .hp,,sits  in  eM.rr.ncv  This 
^vas  don..  Illegally,  of  ,„urse..  hut  in  times  lik,.  that 
<^Npe<hen,.N  -ath.r  t  han  legality  is  t  h..  paran.e.unt  issue' 
«■•  this  way  only  l.ne.  hani.  n.vrv.s  h,.,n  maintain,  .1 

■\  ^'•••.ve.rtainm.th.ulofohtaimni.  n.nnev  t.Mne.re-.s, 
••'^^ms  ,s  tl,..  purchase,  of  u.old  ahn.a,!.  (n.ld  ma; 
al-avsh,.  ohtairud  provideel  a  sutlie  i,.,,!  Iv  hivh  p,.i,c  is 
I';-'  (.'III.  The.  Ia.-c  hanks,  particularl  v  t  hos.  ui  New 
^-iK.  ean  exehanoe.  their  intercst-eanunt,  res, hi, -res.  . 
'•■"-••    ••'"""""    "'     •'^i"'h    are.    well    secure, I    sfoe-ks    ami 


iM{i;sF.\T  coXDrrioxs  uv  baxkixc 


;5T5 


lioiids,  for  <>ol(l  ill  the  markets  of  the  worhl.  ()l)vioii.sly, 
however,  this  metliod  is  extremely  slow  and  very  likely 
to  l)e  expensive,  as  it  may  involve  the  sale  oi'  ^ood  eol- 
lateral  at  saei'iHee  pi'iees. 

4»;»;.   Alilrich-rrcilaiid  Aci.'V\w   Aldrieh-\'reeland 
Ael  of  I <»()«,  ad<i|)ted  as  a  irsult  ol'  the  panie  of  lltOT, 
provided  lor  the  issue  of  an  emer^eney  eireulation  by 
national  hank        I'nder  this  law  national  hanks  in  anv 
conimunity  mi-iht  or<iani/.e  a  national  hanking-  assoeia- 
tion,  any  member  of  whieh.  with  the  ai)proval  of  the 
assoeiation.   eonld    issue   eireulatin^-   notes    based   upon 
(•( itain  s|)eeiHetl  elasses  of  !)onds  or  eommereia!  jjajjer. 
riic  total  issue  of  a  hank,  however,  eould  not  exceed  its 
capital  and  surplus.     'V\\c  emeroeney  eireulation   thus 
|)ro\id(.d    for  was  subject   to  a   tax   of  .j   per  cent    i)er 
annum  durin;^'  the  first  month  and  to  an  increasing'  tax 
in    sueccedinn'    months.      These    notes   could    be    retii'ed 
without  limit  by  the  deposit  of  l(<>al  tender  money  with 
I  hi'  Treasurer  of  the  I'nited  States. 

KIT.  Iinldsticitji.  Although  the  a^'<ire<'ate  amount 
"f  notes  outstanding  increased  fully  four  times  in 
amount  ^incc  IHti.').  the  increase  had  notliin<^'  to  do  with 
the  exj)ansion  and  contraction  of  business.  A  perfect 
'•lU'ruicN  must  lia\e  tix'  attribute  of  elaslicitv,  that  is, 
not  only  the  abiht>  to  ixpand  wjieti  nec-essary  but  the 
pouci-  to  contract  automatically  when  the  necissit\  for 
ixpansion  is  removed.  In  neither  respect  did  the  na- 
tional bank  no'  s  meet  this  need.  'I'hc  re(|uirement  that 
bonds  must  be  purchased,  and  deposited  in  ;idvanci', 
made  the  procediue  s(»  slow  tjiat  oftentimes  the  notes 
•  niiid  not  be  issued  until  the  deinand  for  them  had  dis- 
appiar-ed.     Confi'action  was  excn  si  .wer  because  of  the 

restriction  tb;it   oni\    .so  oiui  itiwi  ii.  tli ■■,.. .•,.  , i.i 

be  retired  in  an\-  oni'  month. 


O  ■»  /> 


^H'^■|:^  and  haxkixo 


1'.^^ 
\\.i 


¥- 


[VV  ol 


4<>H.   !-lvp,u,si(>,i  of  haul:  circn/alioN.      As  a  matt, 
fiict  the  auH,u„t  ..r  iH.tcs  cutstandmn  varic.l  not  at"  al. 
w.thtiK-  husmess  lurds  of  tl.r  cuntrv  luit  cnti.rlv  with 
tl'*'  Pncv  ..r  -ovrrnnirnt  h.,n.ls.      Cpon  this  hitter  and 
"P""  tlir  nn-rcni  c-on.URrcial  rate  „r  intnrst  drpc-nded 
thr  pro/It  to  hr  w.ulv  out  ..f  rimihition.     W'lu'ii  honds 
^vvn■ln^v  thnr  uas  a  trn.hncy  toward  janvhasin-  then, 
;'"<!    incrcasMiu-  cimdation:    when    thcv    swiv   hi-di   the 
U-ndeney  wa.  in  the  ..pposde  direetion.     The  National 
e  .ty    {,nk  ol  Xcw  York,  in  one  of  its  n.onthlv  eirewhus 
stated: 

0.i„j,,oM,,ra<Ml.attlu.|K„n<n,..tp..-tui,hnuu-on,on,v 

f  l;an  ,t  .  ,11  nruv..  l.ark  in  nmilafino.  ,,,,,.  ,  i,,,,,„,,  ,,j.  ^1,  ,_,^. 
'"».■„  on  o.n.n,„„.„t  ho.uls)  a>  pn.fiK  ;„  nm,latH,M  iMc.va..  ■., 
<l-  .'N.n.ov  rat.  of  int.n  .t  i„  the  ,„„„,,,  ,„,,,k..t  d,,.|,n..s  •  and 
as  uvcraj...  n.on.y  n,a---   '    rates  a.ivance,  the  pmtits  on  nr.ula 

;*'"  •'*"•'"•"•      ''''''^   '^  -i   •■•• "'■■   r:u,    that    it   .onl.i   1,,.,. 

*''^'  ;■'""■"  ^""'  ^^'"'1'  't  nu.>t>  in  hun.is  at  the  av..,-ao.  ,„o„,, 
"-'■l^'t  .-at..,  l.nt  ,flt  takes  out  nn.ulat„.,<  it  .an  onlv  loan  an 
•'"""'"■''  "inal  to  the  par  value  of  the  hun(l>  an.l  io.es  the  interest 
Ol,  the  pre,mu,n. 

'''•'<■  I'i^Iht  the  tnark.t  rate  of  interest  the  ..reater 
"••IS  th,.  loss  on  tins  pren.inni.  hence  a  smaller  protit 
""  ^•"•^••''••'ti"M.  Inasnineh  as  the  rale  ,d'  interest  in- 
'■nases  w,tl,  inereasrd  dmiand  lor  n,o,H  v.  the  proljt  on 

*■'""''■""""'"''"'"'  "''^"••""Mcnase  or  notes  was  most 
":"'';■''•.    ''''"■  'I'  l'<  'iden.-e  or  fh,  a.«Teu.al.  .n>o„nt   of 
*■"•'•"';"'""   "I-i    th.s,    hvo   induenees   was   n.  ver  more 
••'""l'''l<l,v  pn.vedlh;,ndi,rin.w   \\H)H.     liotl,  theprireol 
|...v,.rnn,ent    l.onds  and   Ihe  r.,1.    of  interest    were  vrrv 

'"":'''"<|"'  ■■'-I'""-    llHf.  to  eirenhdion  increased  manv 
nnllion  dollars. 


it  isoi,\  i.nis  that  eompreliensix  c  nf 


••rm  was  n(  eessarv 


PHKSKXT  COXDITIoXS  ()F  BAXKIX( 


(ii 


if  the  nation  was  to  lia\  e  a  cni'i'tncy  which  woiihl  tinance 
(.rononncally  its  husintss  needs  and  enable  it  to  pass 
from  j)eriods  of  <4reat  aetivity  to  (piietude  without  eom- 
|)lete  paralysis  of  its  eeononiie  inaehinei",-.  The  chief 
defects  of  the  system  ueir  deeentiali/ation  and  inelas- 
ticity. 

K;!>.  Ldcl.  of  unit//  in  flic  .sf/stcni.—  lw  addition  to  the 
T.OOO  national  hanks  tlure  were  a  -^reat  many  more  state 
hanks  and  trust  eom|)anies.  which  weri  not  onlv  direct 
(•om|)etitors  of  the  national  lianks  hut  which  were  <>ov- 
■viwil  hy  diUVreiit  laws  and  i-eoujations.  'I'he  result  was 
ili\iously  a  nKchanism  with  I."), 000  managers,  each  in- 
terested in  the  welfare  of  his  own  institution.  A  system 
was  needed  wjiieh  would  enable  the  banks  to  work  in 
unison  instead  of  at  cross  purj)oses  with  each  other  and 
which  would  render  possible  the  issue  and  redemption  of 
notes  as  the  need  i\>y  them  mi,uht  appear  and  |)ass. 

iTO.  S'(>-in</.s  hdiiliS.—  A  diseussiiin  of  baiikin<4'  con- 
<litions  in  the  I'nited  States  would  not  be  complete 
without  a  ref«  rence  to  saxin^s  banks.  The  reuulatiori 
of  these  institutions  has,  for  the  m(»st  part.  \kv\\  left 
to  the  slates,  and  in  most  cases  the  states  have  faihd 
to  pass  efrective  le«4islation.  The  savings  bank  is  the 
bank  of  the  wa<4e  earner  whose  accumulations  are  worthy 
of  the  most  careful  protection,  in  thi'  auHi-eoate  the\- 
already  amount  to  a  fabulous  sum.  and  the  system  is 
only  in  its  infancy.  The  mutual  sa\  inus  bank  law^  of 
\ew  Kni^land  and  New  ^■ork  are  the  niost  perfect. 
In  thes<  !)anks  there  are  no  stockholders,  the  profits 
Ik  inti  distributeil  cMtirel\-  anionu  the  d(  poMtors.  Their 
Investments  are  restricted  to  the  very  hinhesl  class  of 
bonds  an. I  morti>anfs.  and  their  atl'airs  are   adminisleicd 

1 i-  1     •!  ■  I  1  11'  •••__•  •      • 

■  ■\     iiifFi    wi     aoiiiiV     rtFiii     jiiiiiiiC    S]>n"il     \Vilo    stTXC     Wltjiout 

compensation.     Tn  the  West  practically  all  tin   savinus 


i 


.',8 


r-i*<T'" 


;}:s 


4T 
f 


-MONKV  AM)  n.WKIvr; 


^M. 


I.anks  are  nv^auhn]  f,,,-  p-ofit  and  no  c-ard'ul  rcul ,- 
tion  ol  invtstinents  is  attempted. 

471.  Am/.,/  savi,u^.s  hauhs.-^-U  was  this  situation 
wlnd.^ave  risv  to  the  .len.and  lor  postal  savings  hank, 
--banks  inanaovd  hy  the  Government  thron-h  the  me- 
<l"nn  ol  the  po,t  olliee  department.  In  1!»|()  C'onoress 
passed  the  aet  providino-  r,,,-  postal  savin-s  hanks?  It 
created  a  lioard  of  Trustees,  eonsistino  of  the  Post- 
master (ieneral,  the  Secretary  of  the  Treasury  ar.d  the 
Attorney  (General,  to  designate  and  eoi.tn.l  the  jx.stal 
sayujos  depositories  throuohout  the  eountry. 

The  Aet  provides  that  any  person  over  "ten  vears  of 
aoy  n.ay  open  an  aeeount  in  his  or  her  own  nam'e.     One 

;'""•"•'•>•  ^i  "Kiltiple  thereof  is  the  smallest  sum  that  mav 
'H'  deposite.l  witl,  the  post  oUiee.  hut  postal  savin.."s 
stamps  at  t.„  eents  may  he  pmrhase.l.  Interest  at  the 
rat.,  ol  -J  p,.,.  c.,,„t  per  annum  is  paid  on  these  .ieposits 

•Vxleposdor  is  aUowed  to  have  more  than  five  hundred 
'l'»llars.  e\elusi\  e  of  interest,  to  his  eredit. 

7''^'  '■""'''^  rceeived  are  directed  t..  he  deposited  in 
sohent  hanks,  statr  or  national.  Xo  one  hank  mav  have 
"""■^■"'''"  '!'<•  amount  of  its  capital  stock  and  one-half 

'tynrplus.     Inteivst  of  at  least  214  p^''- cent  per  anmim 
IS  to  lie  paid. 

The  trustees  may   piiirliase  .uovernnieiit    iionds  with 
part  ..f  thes,.  p,,slai  savin-s   lunds.  hut   n..t  more  than 
•^"  !"■'•  ^''''t  may  he  used  in  this  wav.  for  ,|   ,s  inten<le,l 
t'»  keep  a   workin-  halance  of  (;:>   per  eent   on  deposit 
^;'»l'  <l'ch.':iiks.     Anv<.xcess  of  interest  or  pn.Hts  fn.m 
tl"'  investment  ..f  these  funds  is  part  of  the  postal  rcv- 
'"""■•      'I'!h'   Aet    further   pnn  i.hs   fur   the   purchase  of 
.^••vernment   ho„,js  ,^1'  denomination  ..f  S-jo-.^m)  1,^  the 
'Icposilors.  these  hnnds  to  hear  interest  at  L>I..  vvr  vm^ 
per-  annum.  "  ' 


PHi:si:\'l'  (ONDI'l'IoNS  Oi'   HANKINd  ;ST!) 


'I'lii-  jjostal  saviii^ys  t'niids  aiv  to  he  ke|)t  ^rparatr 
lioni  the  other  postal  rcrcii)t.s  and  arr  ijrottrtcci  hy  all 
llir  laws  already  dealili.u'  with  piihlit-  inonrys.  The  faith 
ol  the  Fiiitc'd  States  is  pledged  for  their  safety. 

It  is  j)rohal)le  that  the  est.ihlishmeiit  of  postal  sa\ - 
iti,y:s  hanks  will  hriiio-  out  of  hi(liii,<i'  J'  eoiisiderahle 
ainoiint  of  ^old  whieh  is  heiiio^  hoai'ded  hy  ignorant  per- 
sons, and  that  money  withdrawn  fi'oni  other  hanUs  dur- 
ing' i)an:es  hy  :ndi\  iduals  w  ill  he  deixisited  with  the  <xo\- 
ernnient  hanks  and  thns  find  its  way  haek  into  eireiihi- 
tion.  The  postal  hank  will  not  eonipete  directly  with 
carefidly  re^'ulated  savin;^s  hanks  heeaiise  of  the  low 
rate  of  intei'est  that  is  paid  and  heeanse  it  does  not  oUVr 
the  same  hankin^'  faeilities.  It  will,  houtxcr.  eatci-  to  a 
class  whieh.  in  the  ))ast.  has  not  deposited  its  mv)Me\  at 
all  and  to  persons  in  isolated  communities  where  there 
are  no  oankin^'  facilities. 

i7'2.  (TiKiraiifcc  of  IxniL'  dcjiosils.  Then'  is  anothei- 
movement  on  foot  in  re^'ard  to  the  regulation  of  hank- 
in^'  which  is  worthy  of  note,  namely,  the  guarantee  of 
hank  deposits  hy  the  ^'ovei'nmeiit  or  hy  the  states.  The 
plan  is  now  in  operation  in  Oklahoma.  Kansas.  Xehras- 
ka  and  Texas,  and  is  hein^'  ur<4C(l  elsewhere.  Hank 
failures  and  losses  to  the  depositors  i-esidtin^  thii-efrom 
have  heen  so  small  in  the  past  that  it  is  estimated  that 
•I  small  assessment  on  each  hank  woidd  create  a  fund 
lai>>f  enough  to  pay  the  depositors  of  all  insoUcnt 
hanks.  In  this  way  confidence  in  the  hanks  would  Ite 
implicit  and  tluy  would  not   hecome  suhject  to  "i-inis." 

The  j)lan  has  heen  viudi-oiisly  attackid.  howcxer.  h\- 
llic  hanks.  'I'heir  position  is  siihsiant  iall\-  that  the  sys- 
tem would  place  a  j)remium  upon  incompetent  and  dis- 
iionesl  o.-tnkini;.  and  uikici-  presi  tii  conditions  ijiri'e  is 
little  doiilit  of  the  coi'reclness  of  the  contention.     'I'lio 


m 


m 


".t 
■i 

i 


^HO 


MONKV   AM)   |{ANKI\, 


stroiio-  l.anlv  niust  be  taxed  td 
■'''1<^'I  ''aiik.  and  at  the  same  I 


t 


I  ye 


that 


pay  httle  attent 


I't^'siilts  rrom  its  stn  ii-^th.     I) 


I'uy  the  (lepositc,  ,  ,if'  the 
inie  it  would  lose  the  |)r(s- 
epositors  would 


<»l  a  hail 


tl 


k.  h 


'""  "iider  sueh  a  system  to  the  stahili! 


Dan! 


leeaiise  their  deposit 
Hy    minht    select.     Tj 


'•^■^■Hy  l)y  the  iiidueements  ottered  hv  tl 


s  would  he  secure  in  ai 

H'V      W,)ul(l      I) 


i\- 


and 


it 


won 


'"  ^pite  of  strict 
Id 


i)c  ver 


y  ditfieult  to  kfep  tl 
without  the  knowledoc  of  the  auth 


rc'^Milation  of  these  iifd 


.y'n-ci'ne<| 
le  various  hanks. 


iieenients 
icm  from  hein^f  uukK 


"ic     i-esu 


It 


orities. 


w 


""'<!    ''^-    the    estahlishment 


Tl 


K'  me\  ita- 


"iiiiks.   e.\j)ansion   of   credit, 
fol  lapse. 

'11 
can  he  prevented   hv   t 


iiian\-  new 


sjjecidation,   and    linall 


:ions. 


'■  '"l\"^"iles  of  the  i,lan  claim  that  tl 
i'c<iuent  and  scarel 


Tl 


"IS  position  is  correct  onl 


icse  conditions 
>i".H'  t'xamina- 


are   |)oss!hle.      And    it   has   I 


y  it  such  examinat 


ions 


eoimtry  that  tli 
'"ily  to  lia\c  the 
insoh  ent  I'or  vear 


"■cii    [hv  experience  of   tli 


iti 


cs  w  ho  ha\ 


•"■'.V    true    it    a    national    svst 


<^y   ii'v  not.      Many   hanks  have   failed 
receivers  discover  that  tliev  have  I 

s  uithout  the  knowlcdoe  of  the  autl 
lis  Would  l)c  pai't 


e  examined 


th 


)een 


lor 


em. 


Tl 


leu- 


<-"l'»pled  tocoNir  l.j.ooo  hank 


em    ot    u-iiarantce    wen 


eonditioi 


IS. 


Whell 


i<s(>|)eratino- under  different 


itr  or    not    elfectiv 


JK'ssihle  III  a  sinnle  state  where  hank 


t'   examination   i« 


uniform   will   I 


and  upon  the  effect 


>c  seen   in  the  experiei 


"t,U'  eonditioi 


IS  are 


ice  ol 


Ol 


lat 


K'M   depends  tl 


iveness  of  the  examinat 


<iahom; 


le  success  of  th 


K'li  and  reo'u- 


rcat  interest  hecaiise.  if  it   p 


watched  with 

CMhIe.  it    uill    he  ucnerally  adopted  a 

in  the  science  of  hankinii'. 


•  \steni. 


It 


wil 


ro\(' 


s  practi- 


s  a  nreat  advai 


ice 


th 


rts- 
uld 


II  \ 


Uiy 

lC(i 


ril-, 


L'W 


a- 


lls 


\ 


(  HAPTEK  XXVTI 

RKI.ATfOX   Ol-   HANKS    TO  WALL  SriUT.T 

IT.'}.   M(ir/,(l   /(ir  sci'iiritirs  in   I  Ik    Suited  States. — 
<\\    ^■()l•k   C'it\-   is  iiir  central   iiiarktt  of  the   Tiiited 


Uates    for  st'ciii-ities    just   a      Lomion 


IS     () 


f   tl 


le   \v 


holt 
t  tl 


le 


\\«)i-|(j.  The  term  Wall  Street,  hy  whieli  is  mean 
(iiiatieial  center  in  New  \'()rk.  is  synonymous  with  mar- 
kets I'or  stocks  and  hoiids.  Whenever  the  capital  re- 
•  |uirements  of  an  cnterpi-ise  ai'c  too  1; 


irm-   for  the  local 


aj)italists  to  handle  it   is  the  custoni   for  ]>i-omoters  to 
inance    tiieii-    proposition    in    New    \'ork.     Capitalists 


w  ! 


th   funds   for  investment  and  an  enterjirise  needin' 
those  funds  are  l)rou^ht  together  hv  the  financial  insti 


lutions  of  Wall  Street.     The  husin 


less  of  hrin^'in^- 


tl 


le 


apitaJists  and  the  enter])rise  toj^'cther  is  wi-v  compli- 
ated  and  may   re(iuire  a  lon^-  time.      In    fact,  a  lar 


xv 


p|-0])01'tlOIl     o 


f  tl 


le  seem-ities  Hoated   in   Wall  Street  n 


main  there  in  the  hands  of  the  promotei's. 

When   a  coi-poiation   wishes  to   raise  capital    it  may 
issue  either  stocks  oi-  uonds.      In  oi-dei-  to  dispose  of  its 


^tock^ 


s  and  t)on(is 


d  1 


to  tl 


le  capitalists  it  is  necessarv 


that 


market  he  made  for  iiiem.  When  the  rnited  States 
Steel  Corporation  was  or<4ani/.ed  in  r.»()l  the  prohlem 
of  disposin;^'  of  the  \ast  amount  of  stocks  of  that  cor- 
poration \\as  an  e\c'eedin,ul\-  I'ormidaMc  one.      The  task 


>f  i,   ttin 


iR'    slirewi 


the 
lest 


piililie  intercNti- 


as  (  ntrusle 


d  t 


(i  lo  one  ol 


siocK  markit  mam|)ulators  on  tlie  ^'x- 
clian,i<e.  .So  successfully  did  Mr.  Keene  mani|)ulate  the 
market   foi-  hoth  common  and  preferred  sliares  that  the 

:}S1 


■  *•-•'■' 


% 


iw 


.MoM.'i     AM)   H.\\KI.N(, 


l)iil)lic.  si)((ul;it(.i-s  and    iincvst 
Iny^v  hiicks  of  tl 

Ti 
ket    I 


•'I's  wrir  induced  to  h 


ii'sc  securities. 


ii'iv  is  a  i-ivat  (leal  of  similarity  l.ctwcrn  tl 


n\- 


ic  inai- 


or  srcuntics  and   the  market    i 


niodity 
and  tli( 


'11 


or  any   rjtlici-  com 


!'•  interval  I.etueen  the  issue  ..f  the  securities 
>""nient   when  they  reach  the  ultimate  investor 


"lio  puis  them  au 
the  income  w  jiich  tl 


\e  oi 


ly  III  his  strono-  hox    f,,,-  the  sal' 
K'>-  eain.  ie(|nires  the  use  of  circulat- 


ing'capital,  just  as  a  merchant  handliiii.- d 
,11(1 


ry  «4-oods  must 


pnn  i,lc  suttieieiif  capital  to  carry  liis  stock  of  o„od 


an  averanc  of  fn.m  three  t 


.s  on 


47 i.    Jt'orh 


o  six  months 


niidd 


//  ■sffiiritics. — Tl 


10 


emen  w 


///,;'■  cd/'itfil  of  (/((ilcr.s  i 

I'"  <'arry  the  securities  in  Wall  Street  he- 
("iv  they  reach  the  ultimate  investor  need  in  their  Inisi- 
11'  ss  enormous  sums  of  temporary  capital.  These  mid- 
<'l^"ieu  are  the  hon<|  houses  and  the  speculators.  The 
^•aj)ital  re,|uired  is  laroely  furnished  hv  hanks,  nearly  all 
'.'*'  '^  '"  »'"•  !■'"■•"  -r  hank  .-rclit.     The  corporations  which 


issue 


le  secui-ities  are   paid   for  them 


|)ass  into  the  hands  of  the  middl 


as  soon  as  the\' 


emeu. 


Tl 


le  middleman 


le  cor 


will  prohahly  pay  (or  them  with  a  check  which  tl 
l""-*'t'""  <-"i  deposit  au.l  a|.'ainst  which  it  can  draw  its 
own  checks  in  niakiiin-  payments:  these  checks  drawn  hy 
the  corporation  are  prohahly  deposited  airaiu,  and  so  on 
"Klcfimtely^  This  hankcrecht  whici 
cii\es   for  its  issues  of 


1  the  corj)oration  re- 


tl 


Heeds 


Tl 


IC   middlemen.   (>itlier   hond    1 


louses   or   speculators. 


who  purchase  the  securities,  horrow  the  hulk  of  th.i'  haul 

credit  tluy  re.)uire  from  the  hanks.     The  hanks  makin^r 

■I  ^Pyi'iHy.f  loanino.  credit  for  this  purpose  arc  known 

I'iie  credit    loaned 


l\'.,!l 


'I     iiii.tfKiai    iianivs. 


o  the  speculators  or  hond  I 


louses  IS  I), 


:ised 


on  coll.itei 


securities  serves  the  purjKJse  of        I 
'^'  forporation  in  producing'  whatever  capital  n,,„ds  it 


HI 


I.ATION    OF   n.WKS  'I'O  WAI.I.  STUKKT 


;5S: 


)li\- 


M'c.inty.     Tliis  collateral  scrunty  is  the  .same  slocks  and 
IioikIs  wliieli  the  credit  paid  ('op. 

47.3.  Dclail.s  (,f  the  collalcr/il  loan.  Wv  have  (hs- 
eiissed,  in  tiie  chapter  on  loans,  the  natnre  of  the  collat- 
eral or  call  loan.  The  vohinie  or  amount  of  this  partien- 
lar  husincss  is  so  enormous  that  it  is  worth  while  to  ex- 
amine more  closely  its  details.  Sni)i)ose.  Tor  example, 
that  a  si)ecnlator  hnys  100  shares  of  Cnion  lacific  com- 
mon stock  at  11>.).  This  ((notation  means  that  the  100 
shares  of  I'nion  Tacitic  stock  are  worth  lO.")  |)er  cent  of 
par.  which  is  nearly  always  .<<100.  Therefore  the  100 
shares  will  cost  the  speculator  .Sr.>..>0().  The  stock  will 
he  purchased  thron<.h  the  hroker.  and  if  the  jjurchaser  is 
a  speculator  and  not  an  investor  it  is  (juite  likely  it  will 
he  purchased  "on  mar<^i?i.'"  The  customer  deposits  with 
the  hroker  from  10  per  cent  to  20  per  cent  of  the  value 
of  the  stock  in  order  to  j)rotect  the  hroker  a-^ainst  any 
loss  should  the  value  decline. 

The  rules  of  tiie  New  \'ork  Stock  Kxchanne  re(|uire 
tliat  every  jjurchase  and  sale  must  he  hona  tide  and  that 
actual  delivery  of  the  stock  must  he  made.  The  hroker 
IS  not  in  possession  of  enonoh  eai)ital  to  })ay  for  the 
stocks  i)urchase(l  on  mar^-in  hy  his  customers  and  must 
i-o  to  the  hank  for  accommodation.  The  hroker  pays 
for  the  shares  hy  drawin^r  a  check  on  the  hank  with 
w  hich  he  is  in  the  hahit  of  doino-  husiness,  and  hy  having- 
it  certified.  The  hank  Mill  loan  on  collateral  like  i  'nion 
Pacific  prohahly  HO  per  cent  of  its  market  value,  which 
wives  the  hank  a  mar^'in  of  20  pcv  cent  in  ease  there  is 
.1  hreak  in  the  j)rice.  The  halanee  of  the  purchase  price 
IS  made  uj)  hy  the  marnii,  ,,f  the  customer  and  the  capital 
of  the  hroker. 

1T<'>.   ('irti/iratian.      ]{  is  (juite  likely  that  at  the  time 
tile  hroker  asks  for  the  certification  of  th(   cheek  he  has 


:584 


.M()M:V    AM)   n.\NKIN(i 


1V~ 


not  siilliciciit  CiMids  in  till'  hank  td  vinvw  nor  can  lir 
liypotlKcatf  the  stock  until  hv  lias  paid  for  it.  The 
l)ank.  Iiow.vcr,  readily  (rrtifR's  the  cluck.  diiHaidin^r 
npon  the  receipt  of  the  collateral  and  the  oiantin<i-  <'f  a 
demand  loan  w  ithin  a  few  lion  is. 

This  is  o\er-certitication  and  is  I'orhidden  hy  the  \a 
tional  liank  Act.  which  says  that  no  national  hank  may 
certify  a  check  unless  the  drawer  has  on  deposit  a  sum  of 
money  e(|iial  to  the  amount  (d'  the  check.  Jn  Wall 
Street  this  law  is  ^-enerally  disreoarded.  I'suallv  the 
i)anks  protect  themselves  a.yainst  technical  violation  hy 
^•ivino-  the  hrokers  credit  for  certain  sums  for  tiie  day. 
accepting-  a  note  in  the  mornino-  for  it.  'riiese  notes  are 
called  "day  notes."  \o  interest  is  cjiaroed  on  the  credit 
cxtcTuled,  i)ecause  the  hrokers  are  constantly  depositing- 
checks  as  well  as  draw  in^-  them.  The  extent  of  this  hus- 
iness  of  certifying'  j)rokers'  checks  is  api)ai-ent  from  the 
H<'-ures  for  the  year  ciidiim'  Oct-'her  1.  li)()(;.  whicli 
amomited  to  the  enormous  sum  of  '•'>(). OOO.OOO. 

477.  Restrictions  on  colhitcral.—Mos  'he  l)aiiks 

are  veluctant  to  take  too  much  of  any  one  setunty  as  col- 
lateral, and  it  may  he  necessary  for  the  broker'to  have 
several  .  ..nk  conneciions  so  that  he  (•.•!•)  (hM;ihrle  the 
shares  amono-  them.  Csually  the  hanks  will  not  take 
uuhistrial  shares  alone  hut  reijuire  an  admixture  of  rail- 
road shares.  I-'urthcrmore.  only  those  securities  which 
have  a  ready  market  will  hf  used  as  collateral  on  demand 
loans. 

trs.  Call  loan  /Y//r.— The  rate  of  interest  char^-ed  on 
these  demand  1;  •nis  is  excecdinu-ly  variaf.le,  running-  all 
the  way  from  1  per  cent  to  IHC  per  cent  per  annum.  I  f 
durin<>-  the  course  oi'  the  loan  there  should  he  a  sharp 
advaner  m  iiiuiiey  rates  tiie  i»orro\\er  is  notified  that  the 
rate  charged  will  he  advanced.      If  the  broker  oi)jects 


RKI.ATIOX   OF  UAXKS  '1 


O  WALL  srUKF/r 


;585 


I 


tt.  the  advance  lie  is  at  liheity  to  pay  the  loan  and  seek 
.urornniodatioii  elsewhere.  Conversely,  if  the  rate  ^oes 
down  he  may  elaiin  a  rcduetion  from  the  hank. 

470.  UcsponsihUUics  of  the  Inau  clcrh.^    All  eollateral 
loans  are  in  eharne  „f'  a  loan  elerk.     In  the  ^reat  Wall 
Street  hanks  this  is  a  most  responsihle  i;osition  rerinirin^r 
keen  and  constant  vin-ijanee.     The  loan  elerk  must  keep 
a  sharj)  watch  of  the  market  and  he  HiUst  kru)w  what  the 
money  market  is  doin^r.     Uc  must  keep  an  eye  con- 
stantly ,,M  the  ticker    (as  the  instrument  for  reportin^r 
(|Uotations  of  securities  is  called),  in  order  to  see  tha't 
tlie  margin  of  all  the  collateral  loans  of  which  he  has 
("har^x-e,  is  properly  kept.     \\^  there  is  a  sud.K-n  slump 
m  the  market,  if  the  value  of  a  collateral  ^roes  down 
and  the  mar^nn  is  not  maintained,  he  sends  immediate 
notice  to  the  horrower  for  more  collateral. 

There  are  certain  i)eriods  when  the  investors  ha\e 
A^nne  out  in  the  market  and  paid  for  a  laro-e  pro- 
portion of  the  securities.  Such  was  the  case  ?n  ]H!)7 
hefore  the  hoom  ])e<ran  under  the  McKiidey  Adminis- 
tration. The  hanks  were  carryinn-  a  \ cry  small  amount 
of  collateral  and  th.e  rates  were  very  low. 

'«^.  VmUffcstcd  sccurith's.—lu  li  few  vears  the  con- 
dition chan-ed  entirely.  The  notations',,^  hundreds 
of  industrial  comhinations  in  the  period  from  18i)8  to 
HXm  hrouoht  into  the  market  an  enormous  (juantity 
of  new  securities.  In  fact  the  issues  were  so  last  that 
the  l)anks  were  soon  filled  up  to  their  limit  with,  collat.ral 
loans.  The  Wall  Street  hanks  were  furnishin^r  the  cir- 
culatmo-  capital  on  which  the  new  corporations  were  do- 
mcr  husiness.     The  stocks  and  honds  thus  held  hy  the 

hanks  were  mllfvl  "iiiwllo-nt+^'l  - ri.-- _  ■"      mi       _", 

IS  a  happy  one  expressin^r  as  it  does  the  stoppa^re  in 

the  re^nilar  i)rocess  c     jassing  the  securities  alon.r  to 
VII— .v,  " 


v-M^. 


.386 


-MONFA    A.,L   JANKINT, 


the  ultimate  investor.  Tiie  securities  wliicii  thus  failed 
to  move  naturally  were  the  cause  of  a  serious  disturb- 
ance ill  the  financial  mechanism.  The  banks  found  that 
they  had  extended  their  credit  to  the  utmost  and  were 
unable  to  jirovide  sufficient  funds  for  industrial  pur- 
])oses. 

The  condition  was  remedied  by  the  crisis  of  1  !)().'i  which 
is  called  the  "ricl,  man's"  panic.  Prices  beoau  to  de- 
cline uhei,  the  banks  be<ran  to  sell  out  the  collateral  of 
weak  holders  who  were  unable  to  furnish  additional  mar- 
gin. The  cumulative  efTect  of  these  forced  sales  caused 
a  very  sharp  break  in  prices,  which  tempted  the  investor 
to  enter  the  market  and  take  away  the  securities,  thus 
restorin/r  the  nu./ket  to  its  normal  condition  and  ^et- 
tin-,--  it  ready  for  the  <iTeat  l)oom  which  culminated  in 
1907. 

481.  Close  relation  hetzccni  reserves  and  ;>r/Ve.v.— The 
credit  which  tlie  financial  l)ankers  of  Wall  Street  extend 
to  the  dealers  and  speeul.  'm's  iu  securities  is  based  upon 
cash  reserves.     Tb"  National  Hank  Act.  bv   permittin^r 
the  interior  hw,^    .,,  deposit  half  or  tbree-tiftiis  of  their 
cash  in  the  res»-rve  c;\v  banks  and  still  count  it  as  re- 
serve, cncoura<rcs  the  pilin^r  np  of  cash  in  these  central 
markets.     'I'his  prru'css  is  known  as  "jjyramidinir"  the 
reserve.     The  dan-rt,-  of  ihis  nuthod  lies  in  the  insta- 
bihty  of  this   cash   reserve,    which   sustains    the   cri'dif 
structure  of  AVnil  Street.     Whenever  from  any  cause 
he  interior  banks  withdraw  tlicir  cash  deposit  the  New 
N  oik   banks  are    forced   to  contract   their  credit,   whicb 
means  that  they  nmst  call  some  of  their  demand  loans. 
SoMic  of  tlif  speculators  will    be  unabh    to  eai-rv   their 
stock  an<i   must   sell   at    wliatever   price  thev  can   ^r^-t. 
So  close  is  the   relation   between  all   kinds  of  business 
ill  this  coMiiry  tliat  a  iireak  in  the  st(.eiv  market  from  the 


KELATION   OF  BANKS    1 


O  WALL  STULKT 


;387 

c-auscs  menti(„„.,l  al.ovr  is  likdv  to  l.avc  ;,  v.-v  .icp.rss 
in-  cfrect  thr..no.j,nut   tlic  ul.olc  c-.untrv.       Ml  „r  the 
|.eri,.,ls  <.i'  (kprcssio,,    wliid,   this   c.untrv  has  experi- 
'■•H'e<l  Iiavc  h,rn  initiate,!  hv  a  panic  in  \Vall  Street 

-yter  th.  panle  of  VJ07  a  «reat  u.any  people  ehar^r^ 
tl.e  tron'.le  to  the  law  pennittinM'  the-  pvra.ni.lin^.  of  re- 
serves. The  ^^  itluirau.l  of  these  reserves  was  ..hviouslv 
''^^  "".ne.hate  eause  of  th,.  panie.  The  a.lvantao-.; 
fn-eu.r.  of  the  n-.h.positin-,'  of  reserves  In  eeonomi/- 
l";^'  the  nse  ol  eash  are  so  many  thai  it  vvo„M  prohahlv 
hv  wiser  to  regulate  than  to  abolish  the  system 

iH'J.   Plan  for  rcwali,},uj  th,  dan<nr  in  rale  position 

>rscrvcs.~i)n.  of  the  authors  has  elsewhere  made  the 

sn,.xest,on    that    the   danuer  of   pynnrnMing   u.ight    he 

■•"•«vly  el.nunated  hy  dividino  (he  hanks  in  \ew  York 

^  ily  into  lu<.  elasses,  eommereiaj  and  tinaneial 

(■"n.mereial   hanks   furnish  eredit  to  merchants  and 

"lanulaeturers  to  he  us.. i  in  tne  production  and  M.ove- 
""''*  '•'  -'""'^^  "'<■  '■'"^'"^•i^'l  '•••"iks  furnish  credit  to 
'"•nkers  and  dealers  to  h^.  us.,!  i„  purehasino.  ,nd  hold- 
-ig  scurdies  uhich  ar,.  dcp.,s,t,,l  as  collateral   for  the 

'"""s.  "■^■•I'sfin.i-ulslnnn.  feature  of  the  tinaneial  hank 
-  I.e  collateral  loan.  This  fa.-t  su...vsts  a  plan  lor 
-Ntnctu.u.  th,  resources  of  the  speculator  without  at 
"le  san.,  time  placing-  any  hurdcn  upon  inu'.,strv  an.l 
loniuicrcc. 

^H.^  Cnnnncrckl  hanks.-  Let  Ih,.  national  hanks  in 
the  t  M-ee  central  rescr^  e  .•ities-\cw  V..,k.  Chicago,  and 
>'.;nu,s«eduided  into  the  tuo  class, ..commercial 
"Id  fuiancial.  Leav  t.,  th,- c,,uirn,  n-ial  n-dio-rd  '>-u' 
'M  ti.e  pnvik.ues  they  ,mw  enjoy  un.lcr  the  Xa^'n'^I 
'i.ijik  Act  i.xcept  such  as  h.Tcinafl.r  state.h.  an,l  in 
^•wditmn  pcnuir  ih,,u  io  ,vcrcise  hust  cunpanv  func- 
loiis,  such  as  acting  as  trustee,  a.luiinistrator,  r(-gislrar. 


388 


MONEY  AND  BANKING 


1 


etc.;  also  <y\\v  tliciii  autliority  to  have  savings  depart- 
ments uiuler  strict  saviii<j^s  hank  laws.  This  concession 
should  he  granted  to  hetter  enahle  them  to  comiKte 
with  the  state  i)anks  and  trust  companies.  Xo  eomii. 
eial  ha!ik  should  he  allowed  to  make  ly  loan,  or  to 
discount  any  eoinmercial  paper  for  an\  hroker  or  any 
loan  secured  hy  the  deposit  of  stocks  or  honds,  unless 
such  collateral  is  taken  to  secure  a  loan  already  made, 
or  one  the  proceeds  of  whii'h  are  not  to  hi'  used  in  trad- 
in>4'  upon  an  e\chan<4e.  \'iolations  of  this  i)rohihition 
will  cause  the  hank  to  he  classified  as  a  financial  hank. 

^Hl.  Fiiianria!  hanhs-.-  A  financial  hank  should  have 
the  ri^ht  to  make  loans  to  hrokers  ui)on  collateral  se- 
curity of  stocks  and  honds  or  warehouse  receipts.  How- 
ever, they  should  not  hi'  permitted  to  receive  deposits 
from  any  other  hank  oi-  hanker  or  from  any  tnist  com- 
])any.  They  should  not  he  permitted  to  issue  circula- 
tion, hut  should  have  the  riylit  to  deal  m  honds  and 
underwrite  issues  of  honds.  Kvery  loan  made  shoidd 
he  posted  in  a  puhlic  place  and  ^Wc  the  name  of  the 
horrower,  the  amount,  the  rate  of  discount,  and  the 
name  of  the  security. 

Xo  national  hank  should  deposit  any  of  its  funds  in 
any  other  institution  exce|)t  a  commercial  nali(.nal  hank 
in  a  central  reserve  city  or  in  a  national  hank  in  another 
city. 

The  forcgoin^r  provisions  are  an  attempt  to  deal  with 
specidation  on  the  hasis  of  present  ha?ikin^r  laws.  It 
is  to  he  hoped  that  in  the  ruar  future  all  the  hanks  nt 
the  country  may  he  incorporated  and  reirulated  under 
one  system.  l''inancial  conditions  can  ne\ci'  he  thor- 
oughly conti'ollt(' 


nor   can 
I i;...: 


le   speculati\e   exj)ansion 
1.1    i:i  »i.. 


,  i ..  I . 


.  -.  I 

i  i  i  K ." 


and  trust  companies  are  made  to  conform  to  the  re- 


RELATION  OF  BANKS  lO  WALL  STREET   38i) 

(luirements  laid  down  for  iiationnl  hanks.  It  is  a  great 
anomaly  to  put  strict  limitations  upon  the  national  hanks 
and  expect  them  to  compete  with  uiu-epdated  trust 
companies;  hence,  in  the  provisions  ahove,  we  have 
yranted  to  the  commercial  national  hanks  the  functions 
uf  trust  companies.  It  were  much  hetter,  though,  to 
ill  l)rive  the  trust  companies  of  hanking  functions,  which 
IIrv  have  accjuired,  hy  usurpation,  until  the  states 
recognize  them  hy  statute.' 

'  Baiiktr'a  Mayaziiie,  Aug.,   1909,  |).  19J. 


15  AN 


t'lIAPTKH  XXVIII 

\'  I)  THK   rXITFI)  STATKS  THF.ASrRY 


•i8.}.  licspousihUitji  of  llif  Scnrfur//  of  the  Trcasurn 
— Few  people  have  any  a(l((|uate  idea  of  the  power  and 
responsibility  attaeliin^-  to  the  j)osition  ol'  Seeretary  of 
the  Tnited  States  Tivasnry,  This  jjouer  and  respon- 
sihility  uas  not  eonseioiisly  oi\rii  io  the  head  of  the 
deparlnient  hut  exists  hy  reason  of  the  failure  of  Con- 
gress to  assume  a  Iturden  and  resj)onsihih'ty  whieh  })rop- 
erly  hilotjus  to  it.  C'on,yress.  or<hnarily  so  eaoer  to  ha\  e 
a  hand  in  e\c'i-y  (jui'stion  of  ini])ortMnee  and  so  jealous 
of  its  jtrerooatixc.  has  in  lliis  ease  liaeked  away  timidly 
frou!  tile  piohUiii.  Icax  in,u  the  Seeretary  to  orappk- 
'vith  it  as  i)est  he  ean.  handii'ai)iH<l  as  he  is  all  the  wlule 
Iiy  notoriously  iiiade(|uate  legislation  and  compelled  to 
take  advantage  of  every  little  teehm'eality  and  am- 
l)i^niity  of  the  statutes  in  ordci-  to  sa\c  the  eouniry  I'roni 
eiMistantly  thi-eatenin^'  panics. 

'I'he  a\ira^-e  Congressman  mav  know  soniethinir 
about  the  silxir  tjuestion  (!.•  jiad  to  learn  that  when 
the  matter  was  the  paramount  |)oli!ical  issue  in  ISlXi), 
liiil  ha\in;4  ^one  so  far  lu  would  he  oidv  too  willinir, 
)f  it  w(  re  ])ossihle,  to  regard  ;,s  settled  the  whole  iutri- 
eate  and  per|)le\in<,^  siihjeet  of  currency  and  finance. 
He  realizes  that  it  is  a.  ••li\e'"  wire  and  that  when  it 
sj)utter.s  the  a{)j)ropriate  thing-  for  him  to  do  is  to  run. 
Somchody.  Iiowever.  must  take  charge  of  the  situation 
and   face  the  dajinrr  of  a  shock.      In  tiie  ease  of  the 


BANKS  AND  UNITED  SI  ATKS  THKASl'HV 


391 


funvncy    problem    tliat    man    is    tlic    Secretary   of   the 
Treasury. 

The  situation  which  confronts  the  Secretary  is  this: 
Tlie  (iovernnv^nt  is  the  hirgest  financial  instituticju  in 
the  country,  it.'  receipts  and  (Hshursements  together 
amounting  to  four  or  live  millions  of  dollars  daily.  A 
large  })art  of  these  transactions  is  made  in  cash,  and 
the  daily  balance  (hie  from  or  to  the  New  York  Clear- 
ing House  must  be  settled  in  cash.  It  may  readily  be 
seen  that  when  the  I'cceipts  happen  to  be  greatlv  in  ex- 
cess of  the  disbursements,  the  Treasury  ai-w  Sul)-Treas- 
uries  will  have  on  hand  a  large  surj)lus  of  idle  currency 
which  has  been  withdrawn  from  circulation  and  from 
ti'c  reserves  of  the  banks. 

iH(>.  Trciisuvji  vdiiscs  slrin/'ciidcs. — There  is  a  cer- 
tain (juantity  of  currency  in  the  country,  consisting  of 
the  various  govermnent  issues  and  national  bank  notes. 
Its  amomit  can  be  increased  or  diminished  but  slowly. 
The  larger  percentage  of  it  lies  in  the  Treasury;  part 
is  in  the  bank  vaults  serving  as  the  l)asis  for  credit; 
the  remainder  is  in  the  pockets  of  the  people.  Should 
aii\thing  ha|)pen  to  increase  the  amount  in  use  by  the 
peo|)le,  it  must  come  either  from  the  bank  reserves  or 
from  the  Treasur\-:  ii'  an  unusually  la'ge  amount  lions 
to  the  Treasury  and  is  not  disbursed  then  tlie  amount 
in  the  ba!d<s  or  in  circulation  is  re<luctd  bv  that  much. 
During  the  past  few  years  it  has  fi'eijumlly  ha|)j)ened 
in  the  autunm  season  that  both  the  amount  dema?'  led 
for  circulation  and  the  amount  lodged  in  th'-  Treasury 
have  increased  suddenly  at  the  expense  of  the  bank  re- 
serves, especially  those  of  New  York  City,  causing  an 
acute  monetarv  stiingcncv. 

The  gieai  buik  oi^  ijic  exchanges  of  tile  country  is 


.'?92 


^roXEY  AM)  BANKING 


made  hy  means  of  rirdit  ratlRT  than  currency.     How- 
ever, the  aiiioiml  of  credit  available  for  this  use  is  rig- 
idly limited  hy  the  amount  of  currency  >vliicli  may  be 
employed  in  bank  reserves.      If  the  l)ankino-  credit  of 
the  country  is  e.\i)an(led  to  the  limit  permitted  by  law 
and  a  ])ortion  of  the  reserve   funds  is  suddenly  taken 
away,  the  banks  must  contract  credit  accordinoly.  hence 
the  immense   importance  of   the   weekly   statement   of 
the  New  York  C'learinn-  House  banks  showing  the  con- 
dition of  their  reserve.     A  contraction  of  credit  means 
a  diminution   of   |)urcliasing   power  and   a   weakening 
demand  for  everything  that  is  bought  and  sold,  stock's 
and  bonds  being  especially  sensitive  to  this  inHuence. 
A   sudden    withdrawal   of  cash   funds    from    the    Xew 
York   })anks  and   the  immediate  contraction   of  credit 
which  follows  when  credit  is  expanded,  is  likely  at  any 
time  to  l)ecome  the  initial  cause  of  a  panic  which  might 
spread  outward  from  Wall  Street  until  it  involves 'the 
whole  country. 

The  Secretary  of  the  Treasury  is  re(iuired  to  keep 
in  the  Treasury  or  Sub-Treasuries  all  tlie  cash  received 
by  the  goveriumnt,  except  the  receipts  from  internal 
revenue,  amounting  to  about  $1.()()0,00()  a  day,  which, 
beiore  the\  arc  "covered"  into  the  Treasury,"  may  be 
deposited  in  certain  banks  designated  as  I'nited  States 
depositories.  As  security  for  these  the  baid<s  must  de- 
posit with  the  Secretary  of  tlu  Treasury  Tnited  States 
bonds  to  the  full  value  oi  the  deposit,"  or  other  bonds 
at  the  discretion  of  the  Secretary. 

This,  tlien,  is  the  situation.  The  j)rospcrity  of  the 
country  depends  to  a  large  extent  on  the  conditions  in 
the  financial  center.      Healthy  financial  conditions  dc- 

•'•••""■■••'•    '••"■    '^le;;;;    ;i '<  I'ii  i<i  Tiit     i()i    ijse 

in  the  markets;  an  inciease  leads  to  speculation,  while 


15ANKS  AND  UNITED  STATES  TREASURY      39:} 

a  (Itcrtase  may  lead  to  dangerous  })anic's.  In  a  word, 
thr  uliok'  of  our  iiidustri  >\  and  linatit-ial  lil'e  rests  upon 
the  t'ouudatioii  of  easii  in  the  Xew  York  bank  reserves. 
'I'iiere  are  two  ways  by  which  this  cash  reserve  nsay  be 
interfered  with — by  withdrawals  and  shipments  West 
and  South  during  the  autumn  season  when  those  sec- 
tions need  an  unusual  quantity  of  cash  monev;  and  by 
the  pilino-  up  of  surplus  funds  in  the  Treasury,  liy 
whichever  manner  the  funds  are  withdrawn  the  effect 
is  the  sanie.' 

4H7.  Defective  currcncn  larcs. — The  condition  above 
outhned  is  not  inevitable  but  is  the  unavoidable  conse- 
(|uence  of  our  currency  and  the  treasury  laws.  We 
know  that  the  system  gives  rise  to  grave  dangers  which 
threaten  the  happiness  atid  Avell  being  of  every  jjcrson 
in  the  country.  Congress  rel'uses  to  change  the  law 
and  the  law  is  incapal)le  of  meeting  the  conditions  as 
they  arise.  The  bankers  of  the  country,  jjarticularly 
of  Xew  York,  are  often  loudly  blamed  because  they 
allow  such  conditions  to  arise  and  exist,  but  amouL'-  so 
many,  who  is  there  to  take  the  responsibilty  or  with 
sulficient  power  to  remedy  the  matter:'  The  banker  is 
conducting  a  private  business  for  private  gain  and  there 
is  no  reason  why  he  should  be  expected  to  assume  a  pub- 
lic function  of  such,  magnitude. 

^KH.  L\r  pal  it'll  Is  of  tlic  .sccirtari/. — The  rcsj)onsil)il- 
ity  falls,  therefore,  upon  the  Secretary  of  the  Treasury. 
rie  is  given  specific  discretionary  powei-s  in  enforcing 
the  laws  and  out  of  these  certain  exi)edients  have  been 
devised  which  may  be  used  mider  certain  conditions: 

1.  The  secretary  has  induced  national  banks  in  one 
way  or  another  to  take  out  notes  in  advance  of  their 
actual  needs. 

2.  lie   has   anticipated   the   payment   of   interest   on 

'Si-c  .\|)iHii,|,\  in  •■  iva.r.il  |{(  scrvp  Act."  I'li^--.  ,)t(!  ,/  .v,r/. 


394 


MONKV  AM)  HANKING 


\W^' 


Tuited  States  l.onds  in  order  to  put  casli  into  cirou- 
Ja'  on. 

3.  He  has  made  purchases  of  (^nited  States  bonds 
lor  the  same  purpose. 

■1.  He  has  made  a  rulin^r  that  tlie  banks  need  not 
keep  a  reserve  a<?ainst  ^rovcrnment  deposits.  Tlie  Xew 
York  Clearing/-  House  Association,  however,  continues 
to  enforce  its  reserve  reciuirements  against  members,  s„ 
that  tlie  effect  of  tlie  ruhn-,  so  far  as  it  concerns  the 
Xew  ^  ork  banks,  is  (Hilhtied. 

o.  He  has  allowed  the  H()vernment  depository  banks 
to  substitute  county,  city,  state,  and  other  bo'nds,  in- 
c'iudu'g,  it  is  understood,  some  railway  bonds,  in  tlie 
place  of  Ignited  States  bonds  as  security  for  i)ublic  de- 
posits. This  privileoe  was  extended  only  to  such  banks 
as  would  au-ree  to  use  the  I'nited  States  bonds  thus 
released  for  takin;^'  out  additional  circulation. 

(i.  He  has  warned  the  depository  banks  to  abstain 
troni  using  their  I'unds  in  Wall  Street  as  a  basis  for  call 
loans  to  speculators  through  brokers. 

7.  He  has  entered  into  the  foreigti  exchange  market 
to  assist  the  gold  importing  movement  by  givin.r  the 
banks  temporary  deposits  of  gold  e,,ual  to  the  anmunt 
tiiey  engage  for  import  from  abroad.  This  removes 
the  disadvantage  under  which  our  im|)ortinL.-  bankers 
labor  that  of  losing  interest  during  the  time  le  gold 
is  in  transit  and  to  a  considerable  extent  stimulates 
^old  imports. 


^^ 


i\ 


CHAPTER  XXIX 


EUROPEAN    BANKING  SYSTEMS 

iVAf.  Bank  of  K upland. —Tht;  Hank  of  England 
owes  its  orio-iii  to  conditions  similar  to  those  whidi  ob- 
tained in  the  United  States  wlien  the  Hank  of  Xortli 
America  was  founded.  It  was  estahhshed  in  1(504  for  the 
purpose  chieily  of  assistino-  the  fiscal  operations  of 
the  ^fjvernment.  On  account  of  the  war  with  France 
the  ^-overnmcnt  was  })adly  in  need  of  money.  Taxes 
of  all  sorts  had  been  levied  but  it  was  very  difKcult  for 
the  government  to  borrow  i)ecause  of  the  confiscation 
in  1(572  of  funds  borrowed  in  like  maimer  by  Charles  II. 
Althouo'li  this  sum,  amountin<r  to  tl..'i()().()()(),  had 
linally  been  j)aid.  bankers  and  individuals  of  wealth 
were  still  very  cautious  about  making  advances  to  the 
uovernment. 

The  original  charter  of  the  Hank  of  Enu'land  pro- 
vided that  it  should  ])e  given  the  power  to  issue  notes, 
to  deal  in  coin,  bullion,  and  commercial  bills,  and  to 
make  advances  on  goods  and  merchandise;  these  powers 
biing  contingent  upon  a  loan  to  the  government  of 
I' 1,200,000  for  which  the  bank  was  paid  8  per  cent  in- 
terest. From  its  ability  to  issue  notes  the  bank  found 
itself  in  possession  of  an  ecjual  anunmt  of  currency 
which  it  was  at  liberty  to  loan.  These  notes  were  not 
payable  to  bearer,  hence  passed  oidy  by  endorsement. 
They  were  ])ayable  at  specified  <latcs  and  bore  interest. 
In  1(597  the  capital  of  the  bank  was  increased,  a  further 
loan    made    to    the    govcrmneiit,    and    the    bank    was 

395 


390 


:vro\i:v  and  hankixg 


given  tiir  iiul,t  to  issue  (K'niaiid  notes  witlioiit  interest. 
^  In  17()!t  an  attempt  was  made  to  nivf  to  the  liank  of 
England  a  monopoly  of  the  bankino-  business  by  pro- 
yuhuu;  that  no  eorporation  or  partnership  com])osed  of 
more  than  six   persons  should  be  given  the   power  to 
issue  eireulating  n(jtes.     'Vhv  issue  of  notes  at  that  time 
M-as  supposed  to  eover  the  entire  field  of  banking,  hence 
this   provision  was   understood  as   prohibiting  any  or- 
ganization  of  more  than   six   persons   from  engaging 
in  banking  in  any  form.     It  is  obvious  that  this  did  ntPt 
prohibit  the  issue  of  notes  by  in(hvi(hiais  or  corporations 
of  less  than  six  i)ei-sons;  nor  did  it  prohibit  the  operu- 
tjons  of  l)anks  of  deposit  by  large  organizations.     This 
fact  Mas  not  understood  for  many  years,  however,  and 
with   the  exception  of  small   "nstitutions  the  liank  of 
England  enjoyed  a  monop<,jy  of  the  entire   field   of 
banking.     The  effect  of  this  monojxjly  was  not  felt  at 
first,   but  with  the  general  development  of  commerce 
M-hich  took  ])laee  in   the  latter  part  of  the  eighteenth 
century    a    demand    for    credit    instruments    appeared 
which  the  Jiank  of   Kngland  could  jiot  meet.     There 
sprang  up  accordingly  a  vast  amount  of  small  but  weak 
banks,    whose  notes   soon  flooded   the   country.     Thev 
were  issued  for  the  most  j)art  in  small  amounts,  and  iii 
1777  a  sueeessi'ul  attem[)t  was  made  to  drive  them  out 
of  circulation  by  prohibiting  the  issue  of  notes  in  de- 
nominations smalLr  than    £.5. 

4!M>.  Dnrlopmcnt  of  the  use  of  chccks.—Mr.  C'onant 
in  his  "History  of  .Modern  Hanks  of  Issue"  says: 

Till'  j)r.)lii!iit;r.n  upon  note  issiius  was  prohnljly  one  of  the 
causes  wliieli  i<.iitril)uted  to  the  use  of  cheeks.  Tlic  notes  issued 
hv  private  bankers  wnv  at  fir>t  written  on  paper  for  auv  odd 
ouiu,   like   proinibbory   note>.       I'lie  practice   was   introduced   hy 


EUUOrEAN  BANKIN(i  SYSTEMS 


397 


C  liild  &  Co.  in  17^9  of  liaving  tlic  notes  partly  printed  :ui(l 
[>,irt!_v  written,  like  a  modern  check.  These  notes  continued 
to  he  issued  till  ahout  179.'5,  when  the  existing  system  was  intro- 
iluci'd.  of  giving  the  depositor  a  credit  for  the  full  amount  of  his 
ill  posit-  and  authorizing  him  to  ih-aw  checks  at  his  convenience 
a<,rain>t  it.  'I'he  issue  of  notes  by  private  bankers  was  not 
forbidden  until  the  Hank  Act  of  1844.  but,  their  use  grad'ially 
diminished  as  the  greater  convenience  i  checks  came  to  be  under- 
stood. 

The  intimate  relation  between  the  Bank  of  England 
and  the  government,  wliieh  had  been  estabhshed  at  the 
outset,  continued  as  time  ])assed.  The  charter  was  re- 
newed from  time  to  time,  usually  on  the  condition  of 
.idditional  loans  to  the  government.  The  war  against 
Xapoleon  was  financed  largely  })y  the  Bank  of  Eng- 
land. Mr.  Pitt  drawing  heavily  upon  the  bank  for  money 
which  was  sent  to  the  Continent  to  promote  the  war. 
These  drains  of  s[)ecie  continued  unabated  until  the 
bank  was  forced  by  Parliament  to  suspend  specie  ])ay- 
ment  in  1797.  The  suspension,  or  restriction  as  it  was 
railed,  continued  until   IH21. 

During  the  earlier  })art  of  this  period  the  Bank  of 
England  was  able  to  keep  its  notes  circuLating  at  par 
with  coin.  The  act  of  1797  had  made  them  legal  tender. 
I'inally.  however,  depreciation  began,  and  during  the 
h(K)m  which  followed  the  panic  of  1810  assumed  con- 
siderable proportions.  In  that  year  a  committee  was 
ap})ointed  by  Parliament  to  investigate  the  fii\ancial 
and  monetary  situation,  and  a  report  known  as  the 
Bullion  Re})ort  was  the  result.  In  this  re])ort  the  real 
evils  of  the  situation  were  ably  expounded,  and  recom- 
mendations made  wbieb.  if  ad.ontcd  Dronintlv  wonjd  jinve 
restored  the  currency  to  a  stable  value.     It  served,  how- 


?     { 


398 


MONEY  AND  HA\KIN(i 


^.. 


pc,.to.,lu(.atcthcn.in,lsnn.Mnker.snr,cl  public-  nun 
^"  :'"  -"..kTstar.di,,^.  of  the  prnhlcn.s  i„volvc.l,  an  oIm- 
oat.oM  winch  l,„re  fVnit  a  ieu-  vcars  later. 

,,,,'',,;';;:,;''f'7'f;i'^->^'--'A^'^'^'>l.lstan,Ianh 

■'^-a.nonnt  nl   ...M.  ,vsnn.,>t,onhc.,.anK.  a  fact       A 
Hvsan.e  tnn.  the  o-ovcnuncnts  pnu.Mo  hnn-ou  "r^.n, 
-'-•'<  -as  n.stnc.te,l  so  th.t  nn  nn-ther  l,.ans  eonl. 
lH.^.nh^.,  h.nt  special  an.hon.y  ,Von.   I'aH.an.ent. 

m  1823  .t  was  (hscovcred  that  the  Hank  of  En.rl,,,,] 
haci  not  been  .iver,  a  monopoly  of  hankin^r  excq,t  in 
Its  note  issne  fnnction.  There  followe.l  aeeonlinolv  a 
movement    to  establish    joint   stock    banks   of   deposit 

.,;;'^'  ;fi^fr^^'-^'--'-^swereinm.e:;!: 

My  estabhshcd,  bnt  it  resnlted  in  certain  c-oncessions 
^"'-/-  I^ankofEn,dand.  In  182(>  the  bank  con- 
sented to  the  establishment  of  joint  stock  banks  of  issnc. 

A  ';'";  .  :;  ""'"  ""'^^  authorized  in  London 
an  lucnnty  but  they  were  not  ,nven  the  ri^ht  of  issue. 
In  lH,i,i  an  act  Mas  passed  by  Parliament  which  made 
the  notes  ot  the  Rank  of  Kn^huul  le^al  tender  as  Ion. 
as  they  w-ere  hem-  redeemed  in  ^old  at  the  bank.  The 
notes  had  been  le^^al  tender  prior  to  this  act  bnt  ordv 
dnrinn-  the  restriction  period. 

491.  Bank  Act  of  m4.-Buvir,<r  the  vears  which 
followed  the  establishment  of  joint  stock  banks  of  issue 
seventy-  wo  such  banks  were  or^rani.ed  and  note  issues 
.Mcreased.  In  1830  and  a^ain  in  1830  panics  occurred 
and  It  was  popularly  thoncrht  that  thev  were  caused  bv 
an  excessive  issue  of  notes.  The  result"  was  ar,  a^^itation 
;  ;,  ^^;minated  in  the  T?ank  Act  of  184-1..  The  charter 
of  the  ]iank  of  Enu-jan.i  was  liefore  Parlianient  f()r  re- 
newal.    The  new  charter  provided  for  the  entire  sepa- 


'JROPi:     N    HANKl.\(i   SVriTKMS 


•>99 


Tl 


le 


ration  of  the  banking  and  issue  dcpartnicnts. 
Iiank  was  ordered  to  deposit  with  the  issue  dej)artmeiit 
L 1  !•. ()()(),()()()  of  ^'•oveniment  seeurities,  wliich  rej)re- 
M!)tc>  the  average  amount  of  eireulation  then  ontstand- 
inn-.  This  deposit  inehided  the  ^'•overninent's  del)t  to 
the  hank,  which  amounted  to  €11, 01.), 1 00.  In  return 
the  I)ank  received  an  eciuivalent  anuMint  of  notes. 
I'lU'tlier  notes  couhl  he  issned  only  after  a  dejjosit  of 
L;(ihl  coin  or  hidhon  with  the  issue  dei)artmcnt,  the  riiiht 
Ml'  deposit  hein^'  ojjcn  to  anyone.  Joint  stock  hanks 
.>f  issue  were  allowed  to  contiinie  issuin<r  notes,  hut  if 
they  retired  their  circulation  it  could  not  a^ain  he  issued. 
In  order  that  this  nn"^ht  not  cause  a  contraction  of  the 
currency  the  IJank  of  Kn^dand  was  <riven  the  ri<4ht  to 
increase  its  de])osit  of  bonds  and  the  notes  which  it 
would  obtain  for  them  to  the  amount  of  two-thirds  of 
the  circulation  retired  by  the  .joint  stock  banks. 

Hy  this  act  the  character  of  the  bank  note  was 
changed  entirely.  Formerly  it  had  been  a  credit  in- 
strument, dependin<r  for  its  current  redemption  upon 
the  reserve  of  the  bank  and  for  its  ultimale  redemption 
upon  the  hank's  ^eueral  assets,  the  bonds,  notes,  etc., 
for  which  it  had  been  exchano'ed.  Its  volume  ex- 
panded and  contracted  with  the  demand  for  medium  of 
exchan<;c.  That  its  excessive  issue  could  have  caused 
the  j)anics  of  IH.'iC.  and  18.'J!>  is  inconceivable.  The 
hank  act  converted  it  into  a  <rol(i  certificate — a  mere 
warehouse  receij)t  for  <jold — destrovintj-  entirely  its 
(•redit  character.  Its  volume  can  expand  now  only  after 
i  dei)osit  of  an  equivalent  amount  of  ^old,  hence  the 
only  economy  the  system  attains  is  in  the  greater  con- 
\('Tiie!ice  of  !)a!)er  monev. 

1.02.  Chamclir  of  Hank  of  England  natc.—Thi:  Iiank 
act  was  followed  by  a  considerable  increase  of  deposit 


400 


MONEY  AM)  BANKING 


■'I 

j(.S 


rip 


)i 


banking-.  Ilnur  its  inelasticity  was  not  felt  until  the 
panic  of  IH^T-  In  that  year,  and  a<rain  in  the  panics 
of  IH.)7  a.nl  1H(!(;,  tlic  (leniand  on  the  hank  for  notes 
was  so  ^vc-di  tliat  the  y-overnineiit  susjjended  the  hank 
act  and  allowed  the  hatik  to  issue  notes  hased  on  its 
genera!  assets.  The  -ate  of  interest  at  which  the  hank 
could  loan  its  notes  was  rixed  in  18.57  at  8  per  cent,  and 
in  18f)(»  at  10  per  cent,  and  the  interest  was  to  he  credited 
to  the  government's  account,  so  that  the  hank  would  not 
increase  its  loans  nnnecessai'ily  with  the  idea  of  niakin^r 
lar^e  ])rofits  for  itself.  In  this  suspension  system,  lies 
the  ojdy  elasticity  of  the  Kn<4lish  plan  of  note  issue. 
It  has  iiad  the  desired  effect  in  the  i)anics  iii  wliich  it 
has  l)een  used,  hut  hecause  it  dejjcnds  upon  the  consent 
of  Parliament  it  is  a  dangerous  device  to  rt;y  u})on. 

4!):J.  The  Ihtuk  of  Eiiirlaud  private— The  Hank  of 
Kn^land  has  always  remained  a  private  corporation, 
hent  n])on  earnin<^-  ])rofits  for  its  stockholders.  It  is 
managed,  iiowever,  in  the  interests  of  tiie  whole  country, 
and  its  management  has  always  l)een  so  etKcient  and 
unselfish  ii..it  many  ])eople  are  under  the  impression 
that  it  is  a  ^n)\ti'nment  institution.  It  still  n-pcafly  as- 
sists the  fiscal  operations  of  the  government  hy  man- 
a^riiicr  the  puhlic  debt,  receivin^r  ^ovt  rtiment  revenues, 
and  making-  \arious  payments,  hut  over  these  lunctioi's 
the  ^n)vei-nm(  nt  has  no  diicet  control  except  when  it^' 
contracts  with   the  iiaiik  expire. 

With  the  growth  of  deposit  hatlkin^^  the  resultant 
iricrease  of  .joint  stock  hanks  of  deposit  and  restrictioji 
upon  note  issue  tin  Hatik  of  Kn^land  has  hec«)me 
chiefly  a  hankers'  l)ank.  It  is  not  ^om  iiud  h\  hankers 
hut  hankers  are  its  cnstomers.      in  fact  the  charter  |)ro- 

directors,  and   the  iioard  is  composed  largely  of  mer- 


EUROPEAN  BANKING  SYSTEMS  401 

cliants.  Its  diief  usefulness  to  bankers  is  as  a  depos- 
itory of  their  cash  reserves  and  as  a  hank  of  re-dis- 
count. 

There  are  no  laws  in  England  compellinrr  banks  to 
keep  cash  reserves,  their  size  bein«-  kft  entirelv  to  the 
.lud^rment   of  the   managers.     The   banks   throughout 
Kngland  find  it  much  more  convenient  to  deposit  their 
cash  in  the  l>ank  of  England.     Xo  interest  is  i)aid  on 
these  deposits  but  the  banks  continue  to  make  them  be- 
cause of  the  right  it  gives  them  to  draw  on  the  city 
I'anks.     The  result  of  this  system  of  concentrating  th<« 
cash  ui  one  bank  is  to  place  upon  the  IJank  of  Englan.l 
the  responsibility  of  holding  the  cash  funds  of  the  entire 
country  not  in  active  circulation,     ^^'hcn   there  is  an 
extraordinary  demand   for  any  reason,  such  as  with- 
drawal of  deposits  by  individuals  and  firms  in  time  of 
panic,  that  demand  is  transmitted  from  one  bank   to 
another  until  it  finally  reaches  the  Bank  of  England. 
For  this  reason  the  IJank  of  England  must  i<eep'"itself 
m  a  position  to  linance  such  occurrences,  and  it  does  so 
by  keeping  a  large  cash  reserve.      It  has  learned  from 
experience  that  a  40  i)er  cent  reserve  is  necessarv,  and 
this  it  aims  to  kee{)  at  all  times.     Its  de^  ice  for  keeping 
Its  reserve  intact   is  the  d.eount   rate.      It  selects   the 
most  urgent  cases  for  relief  automatically   bv   raising 
the  rate  at  which  it  will  discount  paper.     This  imme.ir- 
ately  restricts  loans.      When  the  reserve  piles  up  in  ex- 
<vss  of  what  is  needed  the  bank  encourages  loans  by 
Imvering  the   -ate.     This  is   the   principle   ,ipon   whi,.), 
l"nis  are  made  (..  the  world  ov(  r,  btil  because  of  the 
■  mporlancc  of  the  Hank  of   Ktigland  its  discount  rate 
IS  watched  carefully,  even  i.i  this  country,  as  a  barom- 
<  ter  of  financial  cnrwlitinnu 

VM.  Ihnihing  in  France— '\:\\<i  earliest  attempt  to 

t  —  \  II     ji;  * 


m 


./*/? 


402 


MONEY  AM)  BANKING 


i'' 
fc» 


'•5 


tiH 


:M 


estaulish  a  central  bank  of  issue  in  France  was  made 
l>y  John  Law  in  171(5.  Tiie  bank  was  well  conceived 
and  tor  a  time  was  ably  mana^rcd,  bnt  it  finally  became 
involved  witii  Law's  specnk.tive  schemes  and  went  into 
li(inidation  in  17'21.  The  panic  which  marked  the  end 
of  Law's  career  was  so  severe  that  for  lifty  years  there 
was  no  further  att'Mnpt  to  establish  a  "^real  national 
l)ank  In  1770  the  Bank  of  Commercia!  Discount  was 
organized  only  to  receive  its  death  blow  at  the  hands 
of  the  government  in  1789.  During-  its  i)rief  existence 
;fr  was  well  managed  and  gave  excellent  service.  Tiie 
gnvtrnment,  however,  found  that  its  own  creciit  was 
unstable,  and  in  an  effort  to  repair  it  dragged  the  bank 
down  with  it.  The  climax  occurred  when  the  gov  ,'rn- 
nient  ordered  tlu'  bank  to  pay  into  the  Treasury  a  large 
sum  in  notes  in  return  for  worthless  assignats.  In  1703 
the  bank  went  into  licjuidation. 

4".).>.  liiuih-  of  France. — The  Bank  of  France  was 
foutided  by  Xapoleon  in  1800  with  a  capital  of  .30,000,- 
000  francs.  At  the  outset  it  had  no  special  nrivileges 
in  regard  to  the  issue  of  notes,  nor  was  it  a  government 
institution  in  any  sense.  In  180;j  the  capital  was  raised 
to  45,000,000  francs,  and  it  was  given  the  exclusive 
right  of  issue  in  Paris.  In  1H()(;  the  capital  was  furtiier 
incieased  1o  !K),000,tOO  francs  and  the  present  system  of 
government  was  ado[)ted. 

I'nder  this  .system  a  governor  and  two  deputy  gov- 
ernors an  api)ointed  by  the  state.  These  othcials  must 
l)e  stockholders.  'I'liere  is  also  a  board  of  fifteen  re- 
gents chosen  by  the  stockholders,  but  the  governor  pre- 
sides ov(r  this  board  and  has  general  supervision  of 
loans  and  all  bank  affaii's. 


..  »l... 


■•:r!-.»     -•.*' 

•i-i' 


issue  in  all  towns  in  which  it  had  branches.      During 


'f  '^ 


El'KOl'KAN   BANKING  SYSTEMS 


403 


the  years  following  the  fall  of  Napoleon  its  influeiiee 
waned  somewhat  in  favor  of  the  establishment  of  de- 
partmental l)ank«,.  A  laroe  nnml)er  of  these  were  es- 
tahhshed  between  1830  and  1840  as  the  resnlt  of  the 
!>ehef  that  the  liank  of  France  was  not  properly  or- 
■iani'/ed  to  administer  the  banking  affairs  of  the  average 
citizen.  It  was  popnlarly  beheved  to  be  a  bankers' 
hank.  The  nnnvtii  of  the  (lei)artmentai  banks  soon  re- 
sulted in  a  spirited  contest  with  the  IJank  of  France, 
the  main  [joint  at  issue  bein^'  whether  the  privilege 
oi'  note  issne  should  be  confined  to  tlie  one  bank 
<ir  bestowed  ni)on  all.  The  final  resnlt  was  the  Act 
ul'  1848  which  nave  to  the  JJank  of  l-'rance  a  monop- 
oly of  th.e  note  issne  function.  It  was  re(]uired,  how- 
ever, that  the  i)ank  should  buy  out  the  dej)artmcnt;d 
l)anks  of  issue,  which  it  promptly  did  by  increasi.Mn-  its 
own  capital  stock. 

VM\.  Dcposi!  nirrcucii  little  ii.st'd.—'Vhv  monopoly  of 
till'  note  issue  function  did  not  result  in  buildino-  uj) 
ureat  banks  of  deposit  in  France  as  it  did  in  Kri'dand. 
One  of  the  most  intcrestin^r  features  of  the  French 
system  is  the  undeveloped  condition  of  the  deposit  cur- 
rency. \otes  are  used  almost  cntncly  in  lar^e  trans- 
actior.s  as  well  as  in  the  channels  of  small  trade.  The 
confinement  of  the  privilenrf  of  uoh-  issue  to  the  one 
•ii-eat  institution  has  <«iviji  to  France  a  uniform,  stable 
I  urrency  against  which  tinn  is  little  com|)laint  and  be- 
cause of  which  there  seems  to  be  no  nccessitv  for  the 
_;ro\\  th  of  deposit  b;uikin^'. 

41t7.   ./.v.v</    (iintiif/i.     The    notes    of   the    Hank    of 

Trance  are  issued  on  what  is  known  as  the  bjuikin^''  or 

"asset  currency"  plan.      In  other  words,  there  is  no  spe- 

'liic  iutid  set  aside  for  their  rciCmption.  such  as  is  pro- 

\Kled  l»y  the  Fn>^r|isli  law  ;uid  by  the  National  Hank  Act 


V; 


M 


lU 


404? 


M0M:V  AM)  BANKINC; 


of  the  I/nited  States.  The  vohnne  of  notes  outstanding 
is  fixed  solely  by  the  needs  of  business  and  by  tlie  eash 
reserves  whieh  the  bank  thinks  it  neeessary  to  keep  to 
redeem  the  notes.  Under  this  plan  bank  notes  are 
treated  just  as  deposits  are  treated  in  national  banking 
law — as  demand  obliuations  of  the  bank  against  the  re- 
demption of  whieh  a  reasonable  eash  reserve  should  be 
kei)t. 

In  })ractice  tiie  amount  of  notes  against  whieli  ati 
e(iui\alent  amount  of  eash  is  not  held  is  relatively  small. 
iVIthough  the  Hank  of  Franee  is  not  re((uired  to  {)ro- 
vide  any  speeitie  reserve  it  has  found  it  advisable  to 
kee[)  a  very  large  one,  mueh  larger  than  Me  eonsider 
neeessai-y  in  this  eountry.  The  reserve  of  the  IJank  of 
Franee  will  average  about  60  per  cent  of  its  circulation 
and  consists  of  gold  and  silver  eo' 

408.  linniclii'.s.-  'i'he  bank  is  recjuired  to  maintain 
one  branc'ii  in  every  department  in  Franee.  Each 
branch  is  allotted  a  certain  aniount  of  the  capital,  and 
the  law  re(iuires  that  half  the  ca{)ital  shall  be  held 
locally.  The  total  cai)it:d  is  at  present  1H(),()()(),(K)() 
francs,  or  a|)pro\imately  S.'}(>, ()()(),()()().  Loans  are  made 
by  till'  branches  as  well  as  at  the  central  institution, 
and  at  the  same  I'atc  of  interest.  It  is  worthy  of  note 
that  the  l)ank  oftin  loans  in  very  small  sums,  running 
down  to  a  few  francs.  The  bank  also  does  a  large 
amomit  of  re-discounting,  the  small  institutions 
tlu-oughiiut  l-'iancc  accc  pting  paper  with  the  intention 
ot'  passing  it  on  ai  a  small  piolit  to  the  central  bank. 

The  liank  (y\'  I'liglatid  issues  notes  onlv  agamst  the 
deposit  of  gold  with  the  issue  deparinu  lit  ;  ilie  Hank 
of  I''rance  issues  them  without  any  restriction  whatever 
except  iiiose  iiiij)osed  i»\  its  o\\  n  couseix  atism.  it  is 
evident  that  tiie  latti  r  nu  thod,  although  it  may  not  ap- 


F.UHOl'KAN    HANKING  SYSTEMS  405 

pear  on  its  face  to  be  as  safe,  o-ives  to  the  currency  the 
iinieh  needed  attribute  of  elasticity.     The  Kuulisli  sys- 
tem is  notably  inelastic.     The  volume  of  out^standin^r 
notes  can  be  increased  only  by  the  purchase  and  deposit 
<»r  <4old,  a  method  both  slow  and  expensive.     As  we 
have  seen,   the  rigidity  of  the  system   has  caused  the 
MTowth  of  the  deposit  currency,  the  l)ank  note  losing 
entu-ely  its  true  function  as  a  credit  instrument.     Eng- 
l.ind's  only  resource  in  time  of  acute  strin«rency  is  the 
suspension  of  the  bank  act,  which  in  itself  is  an"  admis- 
sion that  the  system  is  incorrect  in  principle.    Jn  France 
unrestricted  issue  has  allowed  the  bank  note  to  retain 
its  true  character  and  its  im])ortance  as  a  medium  of 
exchano-e.     The   system    is    elastic,    the  vohnne  of   the 
(iieulat.on  ex])andinu-  juid  contractin^r  as  the  demand 
for  it  changes.     Although  there  are  no  reserve  recpiire- 
nients  the  same  result  has  been  accomplished   by  con- 
^eI•vative  numagement,  so  that  the  note  of  the  Hank  of 
I'lanee  has  Ijcconie  as  readily  acceptabk-  as  the  liank 
«•!'  Kngland's  gold  certificate.     The  law  fixes  a  maxi- 
mum limit  to  the  circulation  of  the  Hank  of  France,  liut 
this  is  changed  from  time  to  time  so  that  it  always  ex- 
ceeds any  j)ossible  need. 

The  (|uestion  as  to  which  is  the  betfir  system,  Imw- 
cver,  camiof  be  considered  here  because  it  goes  far 
Ixyond  the  merits  of  the  two  j)Ians  of  note  issue.  In 
Imal  analysis  it  would  be  foimd  to  de|)end  uj)on  which 
s\stem  that  of  perfornniig  exclangis  with  bank  notes 
i'V  with  the  deposit  currency  -would  be  most  economical 
.■mil  best  suited  to  the  needs  of  a  given  country.  Even 
lliin  final  (hrision  of  the  question  must  be  largelv  of 
aradenu'c  value,  for  the  century-h)ng  habits  of  nations 


^  cl« I  I  I  >      \    I l€l  I  I J; t   1  I , 


\  KrioV\  iftim-  oj   ijic  uruier 


in 
si 


lying  principles,  however,  setting  forth  the  t 


\\t»  li 


reat 


4()() 


MONEY  AND  BANKING 


r-'.  f? 


schools  of  hankiIl^^  is  extremely  valuable  to  anyone  who 
is  interested  in  the  unsettled  hanking-  problems  of  the 
I.^nited  States.  France  and  Kn^land  have  each  ^iven 
to  the  world  s})len(li(l  examples  of  conservative,  upright 
banking  which  stand  as  monuments  to  the  ability  of 
their  citizens  to  conduct  private  enterprises  in  the  inter- 
ests of  the  pu])lic  welfare. 

4f)i).  Imperial  Hank  of  (rcnnaiii/.—Thv  Imperial 
liankof  Ciermany,  or  Heichsbank,  was  founded  in  187.5. 
Its  organizatio)!  was  one  of  the  measures  adoj)te(I  by 
liismarek  to  bring  order  out  of  the  monetary  chaos  that 
had  existed  in  the  (German  states  prior  to  the  unification 
of  the  empire.  Together  with  other  monetary  and 
banking  reforms  it  was  made  possible  largely  by  the 
huge  war  indenuiity  of  5*^1, OOO.OOO. ()()()  which  (iermany 
collected  from  France.  In  IHT.'i  the  gold  standard  was 
adopted,  and  the  mark  made  the  unit  of  value  in  place 
of  the  thaler. 

The  Imperial  liank  Mas  organized  upon  the  founda- 
tions of  the  Hank  of  Prussia,  established  a  century 
earlier.  This  bank  was  owned  j)rivately  but  was  con- 
trolled by  the  Prussian  (iovernmetit.  The  Imperial 
(io\ernmeii',  purchased  the  Prussian  interest,  raised  tht 
cai)ital  from  i>0,()()0.(»()0  t balers  lo  1  •_'(),()()(),()()()  marks, 
and  sold  the  stock  to  private  interests. 

')()().  lufhicucc  of  ij;ovcntmcuL  Although  the  gov- 
ernment is  not  a  stockholder  it  exercises  direct  control 
over  the  l»ank"s  iiffairs,  so  that  it  is  much  more  essen- 
tially a  govtrnuKiit  institution  than  arc  the  banks  of 
Kngland  and  France.  Tlse  Chancellor  of  the  Empin 
is  the  gtnerning  olHcer.  Associated  with  him  are  four 
directors,  ofic  named  l)y  the  Kmperor,  and  the  others 
lt\  till-  l''cd(ral  Council.  'I'he  stockholders  elect  annu- 
ally a  commission  of  fiftcdi  members  which  act>  in  an 


EUROPEAN  BANKING  SYSTEMS 


407 


advisory  capacity  but  has  no  real  control  of  the  bank's 
affairs. 

The  bank  acts  as  fiscal  agent  for  the  government 
without  pay;  and  furthermore,  the  stockliolders  share 
tlie  profits  with  the  government.  First,  a  dividend  of 
31/2  per  cent  is  paid  to  the  stockholders;  second,  one- 
fifth  of  the  balance  goes  into  the  bank's  surplus;  tliird, 
tlie  stockliolders  and  the  government  then  share  e(iually 
until  the  stockholders  have  received  8  per  cent,  after 
wliich  the  government  receives  the  remainder. 

.501.  Modeled  on  Bank  of  England.— The  regula- 
tions in  regard  to  the  issue  of  notes  were  modeled  upon 
the  laws  of  Enghuul  witli  certain  modifications  which 
liave  been  very  useful.  Tlie  Ueichsbank  was  given  a 
circulation  of  2.50,000,000  marks,  with  the  further  pro- 
vision that  M-hen  other  note-issuing  banks  (of  which 
there  were  then  thirty-two)  gave  up  the  privilege,  the 
Reichsbank  might  increase  its  issue  in  like  amount.  At 
present  only  six  banks  still  issue  notes,  so  that  the  circu- 
lation of  the  Reichsbank  has  been  considerably  increased, 
its  capital  was  increased  in  1905  to  180,000,000  marks, 
and  it  now  has  .320  branches. 

;502.  7i*r.srnY'.s'.— The  Reichsbank  is  recjuired  to  keep 
a  cash  rcsei've  of  one-third  of  its  circulation,  two-thirds 
being  secured  by  first-class  commercial  paper  maturing 
within  ninety  days.  It  is  evident  that  this  provision 
renders  the  currency  much  more  elastic  than  that  of 
Kngland  where  the  cash  reserve  must  be  100  per  cent. 
Furthermore,  the  Reichsbank  is  entitled  to  exceed  the 
limit  set  for  the  amount  of  no..^  it  can  issue  iiy  l)aying 
a  tax  of  .5  per  cent  per  aruium  upon  all  circulation 
above  the  maximum  limit.  This  creates  :i  circulation 
th.'it  can  be  used  in  emergencies  without  the  necessitv 
of  suspending  the  limit  l)y  special  enactment,  as  Kng- 


iil 


408 


MONEY   AM)  H  AX  KING 


■il^ 


»:  'J 
J, 


land  is  compc-UtHl  to  do.  Tliis  plan  has  been  incor- 
I)oi-atcd  into  a  number  of  the  systems  whieh  have  been 
su^iroested  lor  adoi)tion  in  the  Cnited  States. 

It  is  worthy  of  note  that  no  speeial  fund  is  set  aside 
for  bank  note  redemption.     In  case  of  dissolution  the 
depositors  and  note  holders  would  be  in  the  same  posi- 
tion.    The  deposit  currency,  however,  has  not  grown 
greatly   in   (iermany,  so  that  the  note  holders  would 
always  be  the  chief  creditors.     The  system  has  worked 
out  very  well  in  practice.     The  notes  have  always  cir- 
culated  freely   and   without   discount.     The   bailk    has 
followed  the  |)rece(lent  of  the  Bank  of  Enoland  and 
the  Bank  of  France,  and  conducts  its  affairs  on  a  very 
conservative    basis,    maintaining,    like    the     Bank    of 
France,  an  average  reserve  of  <)()  per  cent  of  its  circu- 
lation.     In  its  conservatism  it  is  very  like  both  its  pred- 
ecessors; in  its  plan  of  note  issue  it  seems  to  have  taken 
a  middle  ground  between  the  two  older  schools,  adoj)t- 
ing  many  of  the  good  points  of  each;  but  in  its  manage- 
ment it  has  de|)arted  entirely  froni  the  other  institutions 
in  that  its  control  is  entirely  in  the  hands  of  the  Imperial 
Cioxcrnment.' 

'  Much  v.iliial)!,-  iiit'orinati,.ii  cnnccrniiig  I'.uni|..-;m  l.,inkinL'  svst.-ms  is 
<-;'iilMin,-<l  iM  thf  tnoncijrr.-.plis  puhlish,,!  I,y  th..  Xation.-il  Monrt.irv' C'o.iiinis- 
Mon  I  icsc  „i,-.y  l)f  (.l)taiiR-ii  from  th.'  SMiHTinl.'ihl.Mit  ..f  niHumi'iits, 
W  ashinjitiiii,   I),   e'. 


CHAPTER   XXX 


£i 


CANADIAN   ILVNKINC;  SYSTEM 

50.3.  Origin  of  banking  in  Canada. — Wherever  a  sys- 
Irm  of  banking  has  been  cstaljh.shed  history  of  some  sort 
lii's  behind  it.  Tlie  aphorism:  "Ilappx  are  the  people 
wbo  have  no  liistory"  may  well  be  doubted;  and  espe- 
;ially  is  this  true  in  the  held  of  commeree  and  finanee. 
Tbe  experiences,  even  the  failures  of  the  past,  prepare 
the  way  for  the  foundation  of  the  nrcsent.  xVlthou<di 
Canada  is  as  yet  merely  a  new  country,  a  country  in 
the  makiiifT,  it  has  had  a  lon<»-  historv  not  onlv  in  the 
|)olitical  but  also  in  the  financial  field.  The  history  of 
her  currency,  whicli  beoan  in  1()8.5  with  the  issue  of 
fiat  money  during  the  French  regime,  has  already  been 
considered,  as  well  as  the  early  IJritish  experiments. 

The  need  of  better  financial  facihties  was  early  felt  in 
Canada.  This  was  especially  true  after  the  Army  Bills 
issued  in  181 2-1 81 4  had  been  withdrawn  from  circula- 
tion. Therefore  in  1817  and  in  the  following  year,  1818, 
private  banking  corporations  were  established  in  Lower 
Canada,  now  the  Province  of  Quehec.  These  institu- 
tions obtained  provincial  charters  in  1821.  to  which  the 
loyal  assent,  then  necessary,  was  given  in  1822.  Upper 
Canada,  now  the  l^rovince  of  Ontario,  was  asked  in 
!S17  to  grant  a  charter  to  a  banking  comj)any.  This 
was  done,  but  the  lieutenant-governor  reserved  the  bill 
lor  royal  assent,  which  was  given  in  1821.  A  fierce  dis- 
pute arose  l)etween  the  ])olitica!  factions  of  the  j)rovii,ee 
over  this  measure,  which  e\entually  led  to  the  govern- 

409 


410 


MONEY  AND  BANKING 


i'l'r 


K  ; 


ment  itself  taking  about  one-fourth  of  the  stock  of  the 
institution,  with  tlie  rioiit  to  name  four  out  of  fifteen 
directors.  Tliis  is  the  only  instance,  fortunately,  of  state 
ownership  in   Canadian  ba..".jig  history. 

In  the  maritime  provinces,  which  became  part  of  the 
Dominion  of  Canada  in  18G7,  tlie  first  efforts  to  estal)- 
lish  banks  was  made  in  Xova  Scotia  in  1801  and  again 
in  1811.     In  1812  the  provincial  governme  it  of  that 
colony  brouojit  out  an  issue  of  treasuiy  notes,  bearin<; 
interest  and  not  subject  to  re-issue,     liut  this  was  fol- 
lowed by  notes  which  bore  no  interest  and  were  re-issu- 
able.    From  this  time  on  until  confederation,  the  prov- 
ince continued  to  issue  treasury  notes.     Sometimes  they 
were  made  redeemable  in  gold  and  sometimes  not.     In 
1807   there  were   in  circulation   notes   to   the  value  of 
c£()0.5.859  (Halifax  currency) .    They,  together  with  the 
issue  of  1800  of  the  Province  of  Canada,  formed  the 
basis  of  the  present  legal-tender  issues  of  the  Dominion. 
Xo  bank  was  started  in  Xova  Scotia  until  182.3,  doubt- 
less because  of  the  existence  of  the  government  treasury 
notes.     This  was  a  i)rivate  bank  and  remained  so  until 
1872.     The  first  joint-stock  bank  was  not  created  until 
1872;  although  in  the  sister  Province  of  Xew  Brunswick 
royal  assent  was  given  to  a  charter  for  a  bank  in  1820. 
o04.  TJw  mhslnictnrc  of  the  Canadian  hanking  sys- 
tem.—\\.  is  maintained  by  Dr.  Adam  Shortt,  the  fore- 
most authority  in  Canada,  that  the  three  charters  granted 
in  Lower  Canada—all  practically  alike— are  the  sub- 
structure on  which  the  present  system  has  l)een  built. 
This  is  now  generally  acknowledged ;  for  during  the  past 
century  no  very  radical  changes  have  been  made.     In- 
deed, there  are  many  provisions  in  these  charters  which 
remain,  almost  unchanged,  in  the  ])resent  general  Bank- 
mg  Act.     Among  these  i)rovisions,   which  are  essen- 


f'AXADlAX   BAN  KIN  (;   SYS'IK^I 


411 


tially  the  same  in  principle,  aitliough  diH'ering  in  de- 
tail, are  the  following: 

1.  The  charter  was  to  continue  in  force  for  ten  years. 

2.  Tlie  directors  were  to  be  liritisii  snbjects.  Tiie 
qnalification  in  stockholding  was  small,  namely,  four 
shares  of  £50  currency  each,  or  -$1,000  jjar  \alue.  The 
directors  were  to  he  remunerated  by  compensation  voted 
by  shareliolders  at  an  annual  meeting  only. 

li.  The  directors  were  to  appoint  officers  of  the  bank 
and  to  take  surety  bonds  for  faithful  i)erf()rmance  of 
duties.  They  were  to  declare  dividends  half-yearly,  if 
sufficient  pi-oHts  were  earned.  They  were  enjoined,  in 
paying  dividends,  from  encroaching  uj)on  the  capital. 
They  had  the  right  to  inspect  all  ))ooks,  correspondence 
and  funds  of  the  l)ank.  They  were  obliged  to  submit 
a  clear  annual  statement  of  the  bank's  position  to  the 
shareholders  at  the  annual  meeting. 

4.  The  bank  might  receive  deposits,  deal  in  bills  of 
exchange,  discount  notes,  buy  gold  and  silver  coin  and 
bullion,  etc.,  but  miglit  not  engage  in  any  other  business 
than  tlijit  of  banking. 

5.  The  bank  could  not  lend  money  directly  upon  real 
property.  It  could,  however,  take  such  ])i-operty  as  ad- 
ditional security  for  loans  already  made.  It  was  not 
j^ermitted  to  lend  money  to  a  foi-eign  countrv. 

C.  The  bank  could  issue  notes  to  circulate  as  nionev. 
but  with,  no  limit  of  amount  other  than  the  general  limit 
for  cdl  obligations.  The  limitations  at  the  present  time, 
as  will  be  seen,  are  (jnite  different. 

7.  The  government  might  require,  at  any  time,  for 
the  ])rotection  of  the  public,  a  statement,  under  oath, 
of  th.e  i)Osit!(^n.  of  the  bHn.k. 

8.  Transfers  of  shares  in  the  bank  were  not  valid  \in- 
less  registered  in  the  stock-book  of  the  bank.    Moreover, 


Mil 

If 

y 


41^ 


MONEY  AND   BANKING 


P 


the  btuik  had  a  prior  lien  on  the  stock,  for  ordinary  debts 
d;ie  hy  tiie  holder  to  the  com})any. 

There  were,  however,  reowlations  diflerinfr  in  prin- 
ciple from  those  in  the  ^nneral  act  now  in  force.  These 
may  be  briefly  siimmarized  as  follows: 

1.  The  total  liabilities  were  not  to  exceed  three  times 
the  capital  stock  actnally  paid  in.  Directors  were  made 
personally  liable  if  they  })ermitted  any  excess  above  the 
stipulated  amount.  Any  di:oetor,  however,  mi<rht  es- 
cape liability  by  publicly  protesting,  within  eight  days, 
after  the  transactions  causing  the  excess  took  place. 

2.  Shareholders  were  responsible  only  for  the  amount 
of  the  stock  for  which  they  had  subscribed,  althouuh  they 
were  subject  to  a  j)enalty  of  five  per  cent  for  non-pay- 
ment of  instalments  at  maturity. 

a.  The  voting  power  of  shareholders  M-as  not,  as  now, 
in  exact  proT)orti()ii  to  the  shares  held,  but  the  number  of 
votes  diminished  relatively  to  the  shares  held.  Vor 
example,  one  share  gave  one  vote,  ten  shares  gave  five 
votes,  and  thirty  shares  ten  votes.  No  lu)iding  gave 
more  than  twenty  votes. 

The  banks  soon  established  branches  and  agencies,  and 
Canadian  banking  began  its  career.  Tluy  issued  notes 
unsecured  by  any  special  pledge  and  exercised  the  widest 
functions  of  banking  without  ])i-ecise  reference  to  the 
pow(rs  conferred  upon  them  by  t.heir  several  charters. 
They  possessed  capital  (piite  r.s  huge,  relativeiv  to  popu- 
lation, as  they  now  have:  and  as  a  result  they  assmned 
a  commanding  position  as  ;i  clearing-house  for  the  ex- 
change of  the  country's  j)rodiicts. 

Of  these  banks— three  ir;  Lower  Canada,  one  in. 
Tapper  Canada,  two  in  Nova  Scotia  .ind  one  in  Vpwr 
Hninswick— all  but  one  in  Quebec  l)ecame  leadmg  in- 
stitutions.   They  are,  moreover,  all  in  high  standing  to- 


CANADIAN   BANKING   SYSTEM 


413 


(lay  or  have  been  honorably  absorbed  by  existing  banks, 
exeept  tlie  institution  in  l/pper  Canada  nhidi,  unbap- 
l)i!y,  became  involved  in  {lolities.  It  failed  in  I8GG  and 
wrought  untold  misery-  to  the  whole  province. 

The  extent  of  the  country  served  by  the  banks  was 
very  great,  but  the  trade  and  i)opulation  were  small, 
almost  insignificant.  'J'lie  i)opulation  was  settled  along 
the  shores  of  the  sea,  the  lakes  and  the  rivers;  and  means 
of  communication  was  almost  entirely  by  water.  Farm- 
ing was  in  a  backward  state;  as  exports,  furs  and  timber 
were  more  important  than  those  of  agi-ieulture.  As  a 
natural  result  the  development  of  banking  lacks  interest 
until  a  much  later  period. 

In  Lower  Canada  the  volume  of  business  more  than 
doubled  between  1820  and  1^30.  The  liabilities  were 
made  up  as  follows:  Capital,  .£3()4,()00;  notes  in  circu- 
lation, £217,000;  deposits,  £lG.*3,000.  Other  items  made 
the  aggregate  a  little  more  than  £700,000  currency. 
The  assets  were  as  follows:  Loans,  £()02.000;  cash  on 
hand,  £103.000.  In  the  same  jear  the  one  bank  in 
Upper  Canada  showed  liabilities  as  follows:  Cubital, 
£77,000;  notes  in  circulation,  £150,000;  deposits  and 
other  bank  debts,  £38.000.  The  assets  were:  Loans, 
£214,000;  cash,  £23,000;  other  assets,  £30,000. 

There  were  several  new  features  added  to  ])anking  in 
this  peiiod,  which  have  survived  in  a  more  or  less  modi- 
t\td  form  to  the  present.    These  were: 

1.  The  principle  establi.shed  in  Upper  Canada  that 
a  bank  coul;l  buy  real  estate  only  for  its  own  use.  Tn 
Lower  Canada  there  was  a  provision  in  the  charttis 
niaking  it  compulsory  to  state  the  animal  value  of  the 
real  estate  held. 

2.  Inal)illty  to  pay  notes  in  specie  on  demand,  forced 
a  bank  into  liquidation. 


41t 


MOxXEY  AND   RAXKLVG 


it    ..  - 

Vx.  \i 


I 


V 


m 


\  1 


3.  In  Xova  Scotia  the  double  liability  of  shareholders 
was  introduced;  althou^rh  this  did  not  as  yet  exist  in  the 
provinces  of  Canada. 

4.  In  New  Brunswick  the  folloM-ing  leatures  were 
added : 

(a)  Xo  bank  notes  to  be  issued  until  one-half  the 
authorized  capital  was  paid  in. 

(b)  Loans  on  pledge  of  the  bank's  own  stock  were 
forbidden. 

During  the  ten  years  preceding  the  union  of  Upper 
and  Lower  Canada  more  than  a  score  of  bills  were  in- 
troduced deahng  with  novel  ideas  in  banking,  mostly 
based  on  experiments  in  the  United  States.  FortunatJ- 
ly,  as  these  measures  had  to  be  referred  to  the  Colonial 
Office  for  royal  assent,  they  were  vetoed.  Xotwithstand- 
ing  the  severe  criticism  of  the  imperial  authorities  at  the 
time,  it  is  now  recognized  that  they  were  right  in  re- 
fusing to  give  their  consent  to  'these  hare-braine(i 
schemes. 

Thus  far,  .,o  joint-stock  bank  had  failed,  although 
when  the  country  was  distracted  by  the  Re})e]li()n  of 

1837,  it  was  found  necessary  by  the  government  to  per- 
nut  the  banks  to  suspend  specie  payments.  This  was 
'liie  not  only  to  political  disturbances,  but  to  the  great 
I'Mi.ic  in  the  same  year  in  New  York.  Previous  to 
tiiat  time  the  b.  nkers  had  never  failed  to  pay  their  notes 
on  demand.  Soon  after,  however,  the  banks  again  re- 
sumed specie  payments. 

^  The  union  of  the  tw„  provinces  of  Tapper  and  Lower 
Canada  in  IHIl  cmphasi/cd  tlu-  importanrr  nf  uniform- 
ity in  b.-mking.  A  committee  on  banking  and  currency 
was  app(,int(d,  which  reported  upon  crtiiin  banking' 
];: riK-ipk.s.     Tiitr  uiuy  niw  and  important  departure  was 


CANADIAN   BANKING   SYSTEM 


4L 


the  restriction  of  note  issues  to  an  amount  not  greater 
than  the  paid-up  r.ipital. 

There  were  no  new  important  'lepartiu'es  up  to  Con- 
federation in  1S(»7.  exce[)t  the  issue  oC  govennnent  })aj)er 
money  in  ISGO,  ah'eady  deserihed,  and  the  Free  IJank- 
iii^-  Act  passed  nearly  a  generation  before,  in  1850.  The 
C  anadian  provinces  were  tlien.  as  now,  carrying  on  hank- 
ing through  a  few  institutions  with  hu-ge  capital,  with 
luiHiches  and  a  hank-note  currency  based  on  general  as- 
sets. In  tlie  State  of  New  \'()rk,  just  across  the  border, 
I  lie  opposite  policy  was  in  effect.  There  were  established 
l);uiks  with  small  cajjital,  no  branclu  s,  and  a  s})ecially 
secured  note  circulation  based  on  i)OTi(ls  of  various  kinds. 
The  Canadian  banks  had  done  well,  and  come  through 
many  trying  times  without  failure;  but  their  pace  was  too 
slow  for  the  public.  And  so  "An  Act  to  Establish  Free- 
dom of  Banking"  in  Tpper  Canada  was  passed.  It  was 
intended  to  create  small  banks  without  branches  and 
\\ith  bank  note,  based  on  the  securities  of  the  province, 
lint  the  ])lan  did  not  work.  The  largest  amount  of  notes 
takeii  o:it  under  the  act  was,  as  re})orted  late  in  18,').5, 
L."{()i),.)40;  after  that  there  was  a  steady  diminution  in 
the  note  issues.  The  law,  however,  was  not  rejjealed 
until  18<>r). 

The  reasons  for  the  failure  of  the  free  l)anks  are  not 
l.ir  to  seek.  The  banks  could  make  more  money  under 
the  old  system.  The  capital  gathered  togetlu  r  in  .-uiy 
eommi  iiity  to  start  a  bank  was  forthwith  sent  away 
tn  buy  the  bonds  as  an  initial  deposit  against  tiotcs.  The 
proprietors,  to  I)e  sure,  secured  the  ru>tis:  l)ut.  except 
for  the  small  iterest  yield  on  the  bonds,  they  were  ex- 
actly in  the  stmc  position  with  respect  ir  the  amount  of 
loanable  funds  as  they  Mere  iK-fore. 

Moreover,  they  were  obliged  thenceforth  to  keep  an 


m 


\.' 
i$'., 


li 


uo 


MONEY   AM)   BAMvIXG 


i^^mt 


office  I'or  (liscoiiiit  and  dcijosit,  and  to  he  ready  at  all 
times  to  pay  specie  whenever  tl.e  notes  were  presented 
tor  i)aynient.  On  ihe  other  hand,  the  cliartered  hanks 
issued  notes  against  tiieir  _yeneral  cre(ht,  and  so  had 
control  of  their  ori^ri^al  capital  and  oi'  the  resources 
arisino-  from  wiiatever  {)ortion  of  their  authorized  note 
issue  they  could  keep  In  circulation.  I'pon  this  general 
loan  fund  they  could  earn  the  current  discount  rate, 
and  whatever  additional  yains  were  incidental  to  hank- 
in.y  operations  in  their  territory.  It  can  thus  he  readily 
seen  that  the  (iiartered  hank  was  the  more  etJicient  iii- 
striiment  hoth  for  the  advantage  of  the  stockholders 
and  for  the  community  as  a  whole.  And  l)ein<r  such, 
it  sur\i\cd. 

.>().).  Hnision  of  the  ffcncrnl  hnnlhi^  measure  of  JS7!. 
—  Enough  has  now  Ikxh  said,  perjiaps,  to  make  it  clear 
that  the  present  Canadian  l.anking  system  owes  its  origin 
to  the  early  l)aidsing  c\j)erin.ents  of  the  several  prov- 
inces.    Limits  of  space  will  not  permit  of  a  detailed  ex- 
position of  hatddng  legislation    from  coid'ederatior.   to 
the  i)resent  time:  nor,  indeed,  is  it  necessary.     The  act 
now  in  force  is  merely  a  revision  of  the  general  hankitig 
measure  of   1H71,   (he   first   hai.K   act   of  the   Dominion 
under  which  the  hanks  actually  worked  (;U  \"w[.,  c.  .')). 
Tlie  first  decennial  revision  of  the  act  look  place  in  1880. 
A  decade  later,  in  1H!>0,  the  act  was  suhjected  to  im- 
portant amendments  which  placed  it  snhsfantially  in  the 
form  with  which  wc  arc  now  familiar.     Again  in  11)00 
several  imi)ortant  changes  were  made.     All  these  modi- 
fications, however,  in  so  far  as  they  hear  ujion  the  system 
as  it  rxisfs  fo-day.  may  he  in  s|  d(  sciJIh.I  Ji,  ;,r.  analysis 
of  the  act  as  it  was  last  rr\  iscd  in  !1)i;{. 

.'}()().   luvnrporali,,,,  (,f  hanks.  -  The  p?-ovisions  of  the 
bunk  act  witli  respect  (o  the  incorporation  of  wvw  hanks 


CANADIAN    BANKINCi    SVSTK.M 


ir 


are  iiitciuled  to  ^nard  aQains*^  the  entry  of  unfit  or  iiie.x- 
j)erienee(l  persons  into  tlie  bankin^r  business.  With  this 
end  in  view  it  is  provided  that  the  niininiuni  re(|uired 
eapital  shall  be  .%}()().()()(),  ol'  whi.-li  ofie-huU'  must  be 
hdiia  fide  paid  in  and  all  subseribed  btt'oiv  a  eertifieate 
(  an  bf  seeui'ed  I Voni  the  Treasury  IJoard  pei-niittin^-  the 
institution  to  be<4in  business.  Xo  eertifieate  can  be 
f^ranted  by  the  I'l'iasury  Hoard  uidess  it  has  been  shown 
that  all  the  re(iuirenients  of  the  act  as  to  the  subscription 
(»f  capital  stock,  fhe  ])ayinents  of  money  by  subserilK'rs 
on  account  of  theii-  sul)scriptions.  the  i)ayments  reciuired 
to  be  nuuK'  to  tlie  minister  ol'  finance,  the  eleciion  of  di- 
rectors, deposit  for  security  of  note  issue,  and  all  other 
j)reliminaries  have  been  compiird  with.  It  also  must  be 
made  cleai-  to  the  board  that  tiir  e\])('nses  of  incorpora- 
tion and  oruanizatioii  aic  i-(  ason;'ble.  'I'his  board  con- 
sists of  the  nn'nistcr  of  finance  and  five  other  members 
nominated  fi'om  time  to  time  by  the  •^'overnor-in-coun- 
lil.  The  minister  of  financt.'  is  clu-irman  of  tin  board, 
and  the  deputy  ministci'  is.  cx-ollicio.  the  secretary. 

The  prcliminai'y  re(]uiremcnt  riiakc  it  impossible  to 
(u-<^ani/,e  a  b;nik  in  Canada  w  itii  any  d(  yicc  of  secrecy. 
The  aj)phcation  for  a  new  chartir  is  soon  known  toevcrv 
liaidxcr  in  the  Dominion.  The  scei'elarv  of  the  Cana- 
dian Hankers"  Association,  although  not  re(|uii"ed  to  do 
so  by  law,  at  once  ^'ets  toL>«tlier  all  pos^ibK"  information 
ill  connection  with  the  new  entei'prise.  He  mav  cvet\ 
(liter  into  u?io(licial  eommiinieation  with  the  yo\crnmcnt. 
and  in  various  ways  h(  Ip  to  ni  ike  it  certain  that  the  new 
^(M)turc  is  conducted  as  a  hmic  fide  bu^.iness.  It  is  thus 
readily  seen  flial.  as  a  rule,  only  b.niks  which  lia\c  allied 
proper  financial  backing-  ha\t'  a  chance  to  enter  the  Held 


I.  I  '.■ 


,).. 


."iOT-   The    l)r(i!iiJi    Jtinifi     s/i.sl(  in.      As    Dean    .lo.seph 


e-vii— ,>7 


US 


M()\i:V   AND   IJANKIMJ 


r'rt'iich  .loIiMsoii  lias  so  fittingly  said,  a  chartered  bank 
in    Canada    is   a    hank   of   liraneiies.    not    a    bank    a\  ith 
branches.      Tlie   jiarent   bank,  wliieh   is   known   as   the 
"bead  olTiee."   neither  takes  deposits  nor  makes  loans. 
It   is  merely  an  a(hninisli-ati\  e  center.      All  the  bank- 
in^'  business  is  (hmc  by  the  branches,  each  of  which  en- 
joys considerable  inde|.en(lenee.     Tliey  are  all.  however, 
subject  to  the  control  of  the  bead  office.     The  law  jjlaces 
no  restriction  ujion  the  number  or  location  of  branches. 
Canadian  baidxS.  therefore.  1ki\c  b'-anchrs  and  agencies 
in  man\   I'orcinii  countries  as  well  as  in  Canada.     That 
this  IS  of  \(ry   ureat   advantage  to  the  commerce  and 
ti'ade  of  Canada  (an   be  easily  se-   v      Tiicre  are  at  the 
present  time  (  I'.MM)  almost  .'{.(MM)     .anches  of  the  Cana- 
dian banks  at  home  and  abroad. 

The  inducement  to  the  establishment  of  branches  by 
banks  is.  of  comse.  the  possibility  of  j)rolit.     Hut  piotits 
can  be  made  only  by  making-  1,,;   i^.     'll^v^^-  |,,;,,,.s  nnist 
i)e  made  litlu  r  by  issuin-.-  circulating-  nolcs  or  bv  oprnin<r 
an   account    uilh   the  bank.      It    is  clear   that    were   the 
possibilities  of  |o:uiin,u-  beyond  the  amount  of  the  capital 
wholly  or  ebiclly  »-outincd  to  one  of  three  forms  of  liabil- 
ity, and  w(  re  the  other  form  distasteful  or  imjmssible  of 
introduction   amon<>-   th,.  eonimumty   ubere  the  branch 
uas  to  be  (  stablished.  the  m..ti\r  for  the  creation  of  the 
l)raneh  would  be  absent.     \ow,  in  anrieultural  commu- 
nities  in    Canada,   win  re    popidntion    is   coniparativch- 
sparse,   the  use  of  diposit-cuiicncy   has  not    bc'n  devcj- 
oped.      in  Iced,  the  eon.btioiis  aiv  such  t|,;,t   tin  \-  would 
scarcely  admit   of   its   use.      \Vv  liaNe.   indetd.  "a  g'reat 
number  of  small  communities  which   -.ould  be  (nfirdv 
iinabh-  to  support   independent   banks    >f  small  capital, 
communities  \vhieb  <!e!>!:!n!!    •!!:■!■•  :-t--i-:.z,f,^    :-..   n. 


II    till     1 1 1 1  1 1 


oi'  notes,  not  in  that  of  deposits.     The  tHcd   for  note 


CANADIAN    HANKlN(i    S'i  S'lKM 


419 


iiirrcTicy,  nioirovei-,  in  tlu'st-  localities  is  not  constant. 
Iiiit  is  manifest  only  at  certain  seasons  of  the  year. 
WJKii  the  (leiiiand  becomes  intense,  at  the  period  of 
iiiovino-  the  eiops.  cnrreney  mnst  he  su])plie(l  (piicklv 
,111(1  at  reasonable  I'ates.  It  is  jnst  here  that  the  llexihil- 
it\  and  the  elasticity  of  the  branch  bankino'  system  of 
(  aiiada  are  most  in  e\  idence.  In  every  ])ioneer  com- 
iiiiiiiity  and  in  the  farthest  frcMitier  the  bank  is  almost 
I  he  lii'^t  instrununt  of  ei\  ili/ation  to  ser\e  the  commn- 
iiity. 

oOH.  Conditidns'  of  nnfc  issue. — Tender  ordinary  cir- 
cumstances the  total  amount  of  notes  in  circulation  at 
any  time  may  not  exceed  the  amount  of  the  nnim])aired 
paid-u])  capital  of  the  bank  to^xther  with  the  amount  «)f 
ciin-ent  yold  coin  and  of  Dominion  notes  held  for  the 
hank  in  the  central  ^(Ad  reserves,  hereafter  to  be  (K - 
scribed.  'J'his  lattei  ])i'o\  ision  was  added  in  the  revision 
•  if  the  act  in  1!>1.'}.  An  amendment  to  the  act  passed  in 
]'M)H  ])i-ovi<!es  for  the  issue  of  what  may  be  termed  an 
emcr^-ency  circulation.  This  issue  is  restricted  to  the 
(•rop-mo\  inn-  pei-iod  (  Sc})tember  1st  to  end  of  February 
loljowinn).  I)u!'in^'  that  time  a  bank  may  issue,  in 
addition  to  its  ordinary  circulation,  an  amount  ecjnal  to 
1")  jier  cent  of  it>  combined  paid-up  capital  and  sur])lus 
<ir  rest  fund.  This  issue  consists  of  notes  which  in  all 
respects  resemble  the  ordinary  ciieulation  of  the  bank. 
It  is  subject  to  a  tax,  not  to  exceed  .1  per  cent  of  the 
iiiiount  outstanding",  until  the  notes  are  retii-ed. 

.")()'.».   (^nifididii  lifivk  nolis  hascd  oil  com incrclal  itsscfs. 

Tile  notes  of  Canadian  banks,  with  tju'  exception  of 
those  that  arc  issued  dollar  for  dollar  on  i^old  or  le^al 
irnders  deposited  in  the  central  reserves,  arc  based  n|)on 
ihc  <^eneral  a<s<  ts  oi  i!ie  iiafiivs.  "iiiis  forms  a  wonder- 
lully  clastic  tnedinm  of  exchati^c.  expanding  and  con- 


r 

'If 


^,'0 


MONKV   AND   B.\.\KI\(J 


(rac'tiiio-  ahiiost  auloiiKitifally.  TIk'sc  notes,  hciii.^-  Imscd 
simply  on  the  general  assets  of  the  banks.  Irvoiiu'.  midfr 
tlk'sc  circunistanccs.  similar  to  deposits.  Tlicy  arc  issncd 
on  demand  from  li'<^itimate  l)()rrouers  and  they  automat- 
ically conti-act  I'y  l.cin<4'  rctnrncd  when  the  need  for  IIk 
enrrency  is  past.  Cnder  sneh  a  system  any  increase  in 
the  demand  for  money,  with  higher  (hsconnt  rates,  adds 
to  the  indncemeiit  to  issne  notes.  There  is  no  delav  or 
inconvenience  sneh  as  exists  where-- as  in  the  Cniled 
.States— honds  mnst  he  i)nrchase(l  and  dei)osited  with 
the  n(,\crnnient  het'ore  ilic  notes  can  he  issned.  The  as- 
sets on  which  the  notes  are  i)ased  are  the  ordinary  com- 
mei'ciai  i)aper  ac(|nn-ed  hy  the  hank  in  the  coin'se  of  its 
re-nlar  hnsiness.  The  l)ank  is  tlins  always  ready  to 
inci-ease  its  circniation  If  the  puhlic  need  more  notes; 
and  all  considerations  oT  |)i()lit  lead  it  to  do  so.  as  its 
power  to  lend  money  will  he  increased  in  projxjrtion  as 
it  is  able  to  snpply  notes  when  that  is  the  kind  of  ac- 
conimodation  re«|nired.  'I'he  motive  of  profit,  too.  brings 
the  banks  into  active  competition  with  one  another,  cans- 
in,o-  them  to  redeem  promj)tly  all  notes  of  other  institn- 
tions  which  are  |)aiil  into  tluin.  and  in  liiu  of  these 
to  place  their  own  enrrency  in  circniation.  And  a 
sonnder  or  more  li(|nid  secnrity.  as  ;i  basis  foi-  note  issues, 
than  o(),)d,  short-time  commercial  paper  can  hardly  l)e 
desired. 

."ilO.  77/('  cciifnd  ■^(,l(f  /T.vcnr.v.— The  provision  for  the 
(stablishiiK  nt  of  central  <4o|d  reser\cs  was  the  most 
iniportant  new  fealnrc  ad('  d  to  Canada's  bankin^'  sys- 
tem by  the  legislation  of  l!»l.*{.  These  reservi-s  will  mi- 
doubtedly  exert  a  potent  inllnence  not  oidv  in  times  of 
stres.s  bnt  the  whole  y,  ar  jnound.  As  already  indicated, 
::;-.  :;.:;;;,-,  ;i;i.:;  i  ir;r  oiii  ,;•;  T  Vm  j  (  ai)i^'  io  issue  iiieir  notes 
to  th<-  ext<i!t  of  their  iinim])aired  paiil-up  capital  stock 


CANADIAX  r.ANKiN(;  s^■s'^l:M 


421 


.ind 


(1  Itcyoiul  that  (  Sfptiinbcr  1  to  l-'thniarv  'iS  i  to  tlic 
liiiouiit  ol"  1.")  j)C'r  cent  of  tlicir  capital  and  surplus  or 
list  funds.  According-  to  the  (luarti'i-jy  statement  of 
April  .'{<),  1!>1.'J.  the  paid-uj)  capital  of  tlic  hanks  was 
-^1  I.j.7t>'.>.217,  and  the  rest  {()>•  sur|)lus)  ainountt'd  to 
si(lS.41  k.'i.'JT,  a  total  of  Ji^-22t.-21.'i,.).)4,  The  emoro-ency 
ciiTuIation  dui'inn'  the  autumn  and  uintc'i-  of  I!)  12-1;) I. 'J 
!iii,i>lit,  thci'eforc.  if  necessary,  haw  reached  somewhat 
(»\er  .'}•')  million  dollars.  In  Xoveniher.  l'.H*_*.  the  emer- 
yency  cii'culation  actually  approached  SIO.OOO.OOO.  and 
the  margin  of  such  circulation  .>  mailable  at  that  time  was 
ahout  -S-JO.OOO.OOO.  At  ordinarx  times  that  mar«rin 
v\()id(l  he  am|)le-.  hut  it  is  easily  seen  that  cii-cumstances 
may  ai'isc  where  such  a  mar/^in  would  he  w  i|)e(|  out.  .Vt 
^ueh  a  time  of  (huiuer  a  comi)arati\ely  insiy'uiticant 
ution  may  stai't  a  panic,  or  a  run  on  a  hank.  ^Vt  the 
I  nd  of  April.  IDl.'J,  the  (ie])osits  ])ayahle  on  (Kiiiand  in 
Canada  were  S.'i(!.).34().()()2.  and  after  notice.  !^(i.'Jl.l(>(),- 
I'SO  a  total  of  Sl)tM;..)()().2S'J.  In  Xoveniher.  1!H2.  a 
month  when  the  ))ressure  is  usually  <4i'eatest.  the  dej)osits 
were  -$1  (».(»()(),()()(>  higher.  To  nuct  a  run  on  such  a  lar<^e 
jiiiiount  a  good  deal  more  than  S2(),0()(),()()()  might  be 
needed. 

The  new  provision  does  much  to  econoi  i/e  time  and 
liring  j)rompt  I'elief.  T'irst  of  ;dl.  a  goxti'imicnt  depait- 
iiient  is  eliminated.  ()f  necissity.  there  would  need  to 
lie  a  laj)se  of  time  to  plact'  go\ci'nmental  maehiiirrv  in 
motion,  as  is  e\  ideiil  now  in  the  time  needed  to  secure 
l)ominion  legal  tcndci's.  Again,  if  recourse  is  had  to 
uojd  imports,  there  is  delay  in  secuiiiig  then),  and  incon- 
\eiiience  in  rel(  asing  the  gold  \\lien  oner  the  jiced  is 
o\-er.  Hut  by  pooling  theii-  gold  res(!urces  in  a  eeiiti'al 
ieser\('  the  hanks  can  imme<hately  rtccixe  additional 
'iiodation  in  the  form  of  notes,  and  still  retain  control 


'1 


H:t 


■Is 


40^2 


MOM'.V    AXn    HANKTNc; 


:ia:,-. 


oT  their  rcser\cs.  It  .should  hi'  lirfc  (.■\i)hiiiRd  th;tt. 
Mhilc  the  C';ma<]i;iii  l)aiik  note  is  not  a  le^al  teiidrr.  it  is 
c'oiisidemi  ahsohitcly  .safe  hy  the  puhhc  heeause  of  the 
safen-uards  [)roteetiiio'  the  holder  from  imnieihate  or 
ultimate  loss.  These  j)ro\  isions  will  he  enumerated  di- 
rectly hi'low. 

However,    apart    from    crisis,    the    central    ,n(,ld    re- 
serves are  expected  to  serve  an   important   i)nrj)ose   in 
normal   times.     During-   recent   years   hank-note   issues 
have  fre(]uently  ai)i)roached  very  near  to  the  limit  author- 
ized hetween  Septemher  1st  and  the  end  of  the  following' 
Fehniarv.     For  instance,  in  .June,  1!»12.  the  circulation 
was  within  «•_'.()()().()()()  ,,f  the  circulation  in  Septemher, 
when  the  emer<4ency  clause  comes  into  operation.     .\t 
such  times  a  «i-reat  deal  of  anxiety  was  caused  the  hankers 
lest  tile  authorized  limit  should  he  reached:  for  tlun  the 
only  recourse  was  to  issue  Dominion  notes  either  !)y  tak- 
ing- them  from  their  reserves  or  hy  securin<r  new  sujjplies 
from  the  ^rovernment— the  latter  expedient  takino-  some 
time,  while  the  former  was  a  dangerous  policy  to  j)ursue. 
Under  the  new  system  any  amount  of  hank  notes  may  he 
held  in  reserve  to  he  released  instantaneously  hy  the  de- 
])osit  of  ^'old  or  Dominion  ^jovernment  notes  in  the  cen- 
tral  reserves.      It  is  ex|)ected  that  the  I)anks  will  keep 
])ermanently  a  considerahle  part  of  their  ^(,1,1  imd  leoal 
tenders  in  the  central  reserves,  so  that  in  eflVct  the  eii- 
culation  will  he  permanently  extended.     The  ^rold  and 
notes  so  deposited,  which  !nay  l)e  in  excess  of  the  amount 
needed  to  cover  the  tiote  issues  of  a  hank,  may  he  with- 
drawn at   any  tinu    after  ii  proper  statement  has  been 
rendered  hv  the  hank  in  (|uestion. 

The  Canadian  li.-mkers'  Association,  witli  the  ap- 
proval of  tlie  ruiiiistci  ttf  i'iiiaiKv.  appoints  three  trustees, 
and  the  minister  a  fourth,  to  liave  charge  of  the  central 


C'AXADIAX   nANKIXG   SYSTEM 


423 


icscrves.  The  association,  too,  uiider  tlie  power  given 
lliein  in  tlie  act,  makes  the  hy-laws,  rules  and  re<riihitioi  s 
respecting  tlie  custody  and  management  of  the  reserve;;, 
\'.  Iiich  are  under  the  charge  of  the  trustees  in  Montreal, 
Canada's  financial  center. 

oil.  Siriirit//  of  note  issiu's. — With  the  exception  of 
such  notes  as  may  l)e  issued  ui)on  gold  and  legal  tenders 
deposited  in  the  central  reserves,  the  law  does  not  retjuire 
the  pledge  of  any  security  for  the  protection  of  the 
note-holder.  It  does  not  re([uire  a  cash  reserve  against 
( ither  notes  or  deposits.  Xo  hank  is  ohhged  to  accept 
the  notes  of  another  l)ank.  The  government  does  not 
guarantee  the  re(kmi)ti()n  of  the  notes,  nor  does  it  bind 
itself  to  receive  them  in  payment  of  dues  t(^  itself.  All 
these  are  features  that  make  it  a])])ear  sti-ange,  at  first 
sight,  that  Canadians  should  unhesitatingly  accept  these 
notes  at  j)ar,  and  nevei*  (juestion  their  soundness  as  cur- 
rency. And  this  confidence  has  been  well  justified,  for 
no  one  since  lh!>()  had  lost  a  dollar  through  the  failure 
of  a  bank  to  i-edeem  its  notes.  This  has  been  due  to  the 
following  legal  reciuirements: 

1.  Every  bank  must  redeem  its  notes  at  its  head  office, 
and  in  such  commercial  centers  as  are  designated  by  the 
treasury  board.  These  redemption  cities  are:  Toronto, 
Montreal.  Halifax,  St.  .Johti.  Winnipeg,  Victoria.  Char- 
lot  tetown,  liegina  and  Calgai'y. 

•_'.  Each  hank  must  keep  on  deposit  with  the  minister 
of  finance  a  sum  of  lawful  money  (gold  oi*  Dominion 
notes)  e(|ual  to  .'>  \ni'  cent  of  its  axerage  annual  circula- 
tion; the  total  so  dei)osite(l  is  called  the  "^-irculation  re- 
demption fund."  It  is  an  insurance  fund  for  use,  if  need 
be,  in  the  redemption  of  notes  of  failed  banks.  The  cir- 
culation fund  bears  interest  at  tiie  rate  of  a  per  cent  per 
annum. 


fjl 

ill 

m 


4-24 


.M<)\l;^    AM)  n.\\Ki.\(; 


''i.  IJ;inl<  iioUs  possess  :i  first  lien  upon  tlic  assets  of  ,i 
iiank. 

4.  Hank  stockholders  aie  lial)i( .  in  the  even!  of  u 
l)arik'.s  iaihn-e.  to  an  assessment  e(|i.al  to  tlie  par  vahie  of 
then-  stoek.  'I'liis.  ol'  eonrse.  proteeN  the  general  cred- 
itor as  well  as  the  note-holder. 

').  Kach  hank  ninst  oive  a  detailed  monthly  statement 
of  its^airairs.  accordin-'  to  a  schedule  provided  in  the 
Jict,  These  statements  must  he  signed  hy  responsihle 
officers  of  the  institution. 

5.  Provision   is  made  in   the   rexision  iA'    IDl.'J   for 
s.iareholdcrs'  audit  of  the  hank's  affairs:  and  also  for  a 
sj)ccial  rei)()rt   from  the  auditors,  wiien   ivqnired  hy  the 
mim'ster  of  finance. 

7.  The  Canadian  Hankers'  Association,  an  in^'orpo- 
rated  hody  of  uhifj,  rach  hank  is  a  mem!)er,  is  ^-iwn 
supervision  hy  the  act  of  the  issue  and  cancellation  of 
notes,  and  of  the  affairs  of  a  failed  hank. 

8.  The  notes  of  a  failed  hank  draw  irtvnst  at  .5  per 
cent  from  the  date  fixed  for  their  redemption  hv  the 
minister  of  finance,  who  may  redeem  then)  out  if  the 
assets  of  the  i)ank  or  out  of  the  ^circulation  redemntion 
fund."  ^ 

These  reciuircmciits  make  the  Canadian  hank  note  ab- 
solutely safe,  althou-li  the  first  feature  is  the  most  im- 
portant one.  In  that  respect  tlic  Caria.ilan  system  for 
retirino- notes  resemhlcs  the  famous  .Suffolk  plan  of  note 
rcdemi»ti()n.  the  most  successful  experiment  in  early 
American  hanking-  history. 

.512.  h't  serves  ftard  /;//  etch  hank.—Tho  snhjeet  of 
cash  reserves  docs  not  receixc  much  attention  in  the  act. 
It  is  almost  iiicredii)le  to  the  Ameiican  hanker  that,  aj)- 
paj-ciJiiV,  so  ill  lie  rn.Mi-iii  Is  ^^'\\\-u  to  this  vital  feature 
in  sound  hankino-.     The  law  merely  provides  that  the 


CANADIAN    HANKINC;    S\sri:.\l 


4i>5 


hank  sliall  hold  not  less  than  K)  per  nut  of  its  cash  i-c- 
scrvcs,  which  it  has  in  Canaihi,  in  Dominion  notes.  The 
ininistcr  of  finance  must  make  all  necessary  arrange- 
ments to  deli\er  Domin  on  notes  to  the  hanks,  in  ex- 
change for  gold  coin,  at  the  se\eral  hfanch  otiices  of  the 
department  of  tinanee  at  which  Dominion  notes  are 
ifdeemahle. 

It  is,  of  course,  necessary  that  a  hank  sliould  he  ahle 
at  all  times  ;o  meet  its  demand  ohligations.  and  to  that 
end  should  have  always  ^ome  |)ortion  of  its  assets  ready 
ill  tlie  form  of  legal-ttnder  money.  lint  what  that 
amount  of  cash  reser\-es  shoidd  he  will  depend  ui)on  niany 
I  irenmstanees — tiie  husiness  hahits  of  its  customers,  the 
extent  and  character  of  its  demand  and  shoi't-time  lia- 
t»ilities,  and  especially  upon  the  degree  of  caution  and 
conservatism  employed  in  its  management.  In  well-es- 
taldished  hanks,  managed  ly  conservati\e  and  experi- 
enced hankers,  the  ])i'ol)lem  always  settles  itself  without 
dilHeuIty.  That  is  why,  among  other  reasons.  Canadian 
hankers  ohjeet  to  fixed  reserves  heing  made  .*i  re(iuire- 
ment.  The  hankers  nemselves  ire  hetter  al)le  than  any 
government  to  decide  what  pioportion  of  tlie  dejxjsit  or 
note  liuhility  the  '>ank  recjuires  iti  the  foi'm  of  cash,  to 
meet  any  calls  which  may  be  made.  \\'hen  that  is  de- 
termined, Canadian  t)ajikers  endeaxor  at  all  times  to 
hold  an  amount  which  is  safely  ahove  the  re(|iiii'ed  limit. 

Without  entering  into  any  expended  theoretical  dis- 
cussion of  the  matter,  it  may  further  he  said  that  Cana- 
dian hankers  maintain  that  a  I'cserve,  if  it  is  to  he  of  any 
service,  must  l)c  read}-  for  instant  use.  Xow  a  fixed 
legal  resei-\e  may  deieat  its  own  ends  if  the  law  is 
strictly  enfoived.  This  is  sufficiently  well  recognized 
in  the  United  .'-  ates  where  the  hanks  have,  in  periods 
of  stress,  on  more  than  one  occasion  depleted  their  legal 


^2(i 


.M()\i;^'    AM)    H.\\K(\(, 


fsf- 


reserves.  One  of  the  most  iiotaMe  iiistaiiees  oecnired 
in  the  first  weeU  of  August,  1K!»;{,  when  the  aogicuate 
reserves  oC  the  \''\\  York  C'itv  ha?)ks  uere  $1  i,()()(>.000 
helow  tlie  2.")  ]hv  eeiit  Hmit.  Caiuidian  bankers  aHirni, 
tliereforc,  that  in  hist  analy  is  th'-  fixed  leoal  reserve  is 
usifnl  only  as  a  sort  of  \iarnin  ;■  hell — a  notiee  to  the 
i)anh  that  if  its  reserves  fall  Ih-1o\v  a  eertain  limit,  its 
cash  and  liabilities  are  not  in  the  i>roj)ortioi\  that  eon- 
ser\ati\e  bankers  would  ai)i)rove.  They  maintain, 
moreover,  that  a  jaw  re(|iiirii.o-  Icual  reserves  may  he 
(|uite  applieable  to  a  system  v.l'  thousands  of  e()mj)ar;'- 
tively  small  indejiendent  banks,  but  that  sueli  is  not 
needed  in  the  Canadian  system,  wiiieji  is  made  up  of  a 
limited  number  of  very  powerful  banks  under  the  con- 
ti'ol  of  eonserv.ttive  and  experieneed  managers. 

A  Canadian  bank  manager  keeps  before  liim  the 
amount  of  time  dei)osits  and  demand  deposits,  and  the 
notes  outstanding.  The  time  deposits  form  mueh  the 
largest  of  these  items.  They  bear  interest  at  :i  per  eent. 
and  while  not  legally  jjayable  on  demand  they  are  always 
l)i'omj)tly  paid  on  reciuest.  no  banker  wishing  to  have  it 
rumored  that  all  obligations  are  not  pr()m])tlv  met.  A 
l)aiik's  credit  would  suffer  if  it  took  advantaiie  of  its 
legal  privilege  to  delay  payment  for  even  ten  days. 
With  these  faets  before  him.  experience  and  intimate 
knowledge  of  the  bank's  afi'airs  ))ermit  the  manaiicr  to 
ad  just  the  reserves  very  near  to  the  ideal  limit. 

.jI.'J.  Ji'cscncs  composed  of  four  dements. —  In  prac- 
tice the  bankei-  considers  his  reser\cs  as  conn)iisin<''  four 
different  kinds  of  assets:  (1)  Cash  on  hand,  (2)  cash 
balances  in  other  banks.  {'.\\  call  loans,  and  (4)  securi- 
ties. Strictly  sjjcaking  "cash  reserves"'  mean  only  the 
Mrst,  t)ut  a  banker  usually  has  In  mind  tlic  first  and  sec- 
ond when  s|)eaking  of  his  cash  reserve.     There  is  a  gen- 


(  A.\.\i)iA\  ii.\\i(iN(;  s^■s^^,.M 


421 


I  lal'iN"  imdiTstood  ;i;41"((1ikii!  ;iiii<)||m  ||i,  |),iii]<s  tli.U  in 
■irdiiKiry  tillK■^  the  cash  rcs(,r\ts  ol'  a  hank  du^IiI  to 
.(|iial  !.■>  j)c'r  cent  of  its  lial)iliti(.'.s.  Ol'  tli\  H  jici-  wwt 
^lM)lll(^  !)(.'  casli  Mil  hand,  the  rfiiaiiiiinu  T  |'<i'  cnil  hcm^' 
lalaticcs  diiv  IVdid  othfi'  l)aid-v-<. 

l''r.')Tii  thr  American  point  of  x'hw  Canadian  hanks 
'Id  a  \cry  ..all  amount  of  cash  in  pi-oporlion  to  their 
(li-nosiK  and  note  issues.  Acco!-(iinLi'  to  the  I'elurn  of 
May  .'il.  li)\ti.  tile  cash  on  hanii  amounted  to  ■'^l.'J.'J.-i^}.),- 
.'{TJ.  and  je  net  liahihties.  notes  and  al!  dejiosits  in- 
ehided,  amounted  to  ^'. 1. 1!*."), HIS. .■}!•?.  ihe  ratio  heiu'i  only 
a  little  moi'c  tluui  *.»  per  cent.  Hi:l  for  manv  years  the 
(■a^h-on-I;and  I'cstr'.e  has  .•u'cra^cd  hetwecu  10  and  12 
pi  r  ce?it  of  the  net  liahihties. 

.J14.  Call  loans.-  At  the  end  of  Ma  v.  lOl.'J,  tlie  (\i- 
nadian  harks  had  S(;i>/.)S'J..")  K)  of  (••lil  loans  outstandiiu^' 
In  Canada,  and  «'M;.1.-,1.-J0*>  elsewheic.  Most  of  the  lat- 
(i  !■  wci'c  out  in  New  ^'ork  ("itv.  the  fa\i)r:te  call-loan 
market  lor  Canadian  hanks.  '!'h<'  hankers  do  not  re- 
L'.ar.j  call  h.uns  in  the  country  as  iti  .uiy  I'cspeet  e(]uiva- 
leiit  t»)  cash.  Tiie  eollateraJ  securities  i-annot  he  (piickly 
niarkotul  without  a  sacritic<'.  the  stock  market  not  heinu; 
on  a  sutHciently  lii-oad  hasis  in  Canada.  Moi'eoNci-.  the 
payment  of  domestic  call  loans  would  result  sii;ii)ly  '"  •■• 
i'educti(!U  of  hank  dei)osits.  as  has  often  Wvn  illustiated 
hy  a  ])arallel  situai:i(;i!  in  \ew   'S'oi'k  C  ity. 

It  is  (juiie  otherwise  with  a  call  loan  payal)lc  in  Xew 
N'ork  City,  and  scured  hy  hitih-elass  collateral.  In 
noimal  times  such  loans  can  he  convei'ted  into  mon>.  y 
within  tweidv-fo'.;r  hours.  'IMiis  adds  to  the  h;!nk's  cash 
reserve  in  Canada  cither  hy  the  sale  of  Xew  'S'ork  ex- 
change or  hy  an  im|)ortation  of  ^old.  If  the  market  is 
|)anicky  ni  .New  \ Ork,  and  ^'old  camioi  he  secau'cd.  as  in 
11)07.  the   Canadian   hanks   may   use   tlicir  Xew    \ovk 


m 


i'-'s 


MOMIN     AM)    |{.\\KI\(; 


1:1 


U'l: 


hjilanccs  to  l)iiy   ^hi'ljim   I. ills  of  (•\cli;m^(..      TIk  y  vaw 
tlicn  iiuporl  rrcin   LoikIom  w  Imtcxcr  u(,!,|   |||..y  m,,!. 

."jI,").  1  iivisliinni  scciiril/c.s.  Haiikrrs  (■aiiiiot,  and  as  a 
nilr  do  not,  ])\iivv  iiiiicli  i-cliaiicr  upon  stcuriHis  as  nai! 
of  tlifir  iTsfi'\  CVS.     Tlicsr  foi'in  a  srcond   li  dcfciKv 

to  wliich  tlif  liafd<s  do  not  cxixcl  vwv  to  :  ivcii.     It 

Mould  taUe  sonic  lime,  of  conrsc.  to  rcaii/v  ^lon  the  ;■ 
sernntics.  'n  tlicii-  cjioicc  of  iiu  cstnicnt  the  hanks  ai'c 
not  liariipcml  hy  law.  Tiny  may  purc'Jiasr  iVdcral  and 
|)i-o\incial  honds.  and  a.'so  tli"  bonds  of  Canadian  and 
foreign  cities,  and  tlir  stocks  and  honds  of  domestic 
a?id  foi-cioi!  railways  and  indnstrial  corporations.  On 
.May  ;n.  I'JIM.  the  h.-.nks  held  scuirities  as  loMous:  I)o- 
tninion  and  pi-o\  incinl  -4()\ei'nm(nt  secm-ities.  S'.>. ()()!>.- 
H<!1  ;  Canadian  mniicipal  secnrit  ies  and  Mntishand  foi- 
ei->n  puhlie  se.";rities.  s-_>;{.s-J7.t;i;{ ;  railway  and  otiur 
honds.  dehentiircs  and  stocks.  Sf;7.(»-Ji .;,  tl.  As  a  luh  . 
the  securities  held  hy  the  hanks  do  ii,,t  llu-'tuatc  ui-(atl\ 
iii  anionnt;  tlic\-  ]>vvi\y,  as  a  rule,  to  rednce  their  cajl 
loans  in   \eu    'S'ork  to  Ixiild  up  their  casji  riser\cs. 

")1<;.   J,<>(iii.s  In  iiKiniil'achircrs.  :Ji<il(.sa!(r>:  ,1111/  fann- 
ers.     Ill   addition    to    the    power    ^ranttd    to    Ca?iadian 
hanks  to  cn^au,.  {,,  ordinary  hankinu  l>iisiiicss.  they  arc 
permitted  to  assume  \(r\    important   functions  in  aidinu 
the  manufacturino-  and  wliolcsak    trad<-  of  the  eouiitrv. 
The  haidar  is  empowered  to  lend  mom  y  en  the  sc.an'ilx 
of  wan  house   re'ci|)ts  and   hills  of   ladiuL',.      Loan-  are 
^;|-atil((j  to  wholesale  dealt  rs  and  d'lppt  in  of  produce  of 
all    kinds.      The  hanks  ha\c  a    lien,   not   only   upon   tln' 
^oods  oriwinally  acee|)ted  as  sccui-ity.  hut   also  upon  the 
^■oods   which    ill    the  c.airsc  of  hiisi;,ess   aiv   >.iihsiitut( d 
therefor.     The  same  jiolicy  is  *'   llowcj  in  |,,;i|p,  ,,,..,,1,,  |,, 
inaniifacturt  rs.     Thus.  ili.    hanks  hecomc  \  irfiialU   silent 
partiurs  in  hii>iness.     As   far  as  pi.ssihle.   the  hank  act 


«-s-^ 


rANADIAN    IJ.WKINC;   SVSTK.M 


V2{) 


i  II I 


iii.ikcs  iiicirliandisf  of  all  kinds  a  sort  of  collateral  siru- 
niy  for  l)aiik  arlxaiicvs.  A  lar<ic  part  of  the  so-ealled 
(iiiiiiiRrc-ial  paper  in  Canada  is  secured  praetieally  1»\- 
e  to  o-oods  ill  Wiiirlioiises.  faetoi'ie?  and  wholesale 
les.  In  this  way,  to  a  niiieh  ^nater  extent  than  is 
uciK  rally  reeo,niii/ed.  the  banks  are  heliind  tlie  trade  and 
industry  of  the  country. 

Ill  the  last  i-e\ision  of  the  act  (IDI.'J)  additional  bnsi- 
ii(  ss  of  this  nature  was  made  possible  for  the  baid<s.  It 
was  at  first  proposed  that  a  bank  nii^ht  lend  nionev  to 
;t  lai-nier  upon  the  security  of  threshed  ^niiii  of  everv 
kiiid  and  to  a  rr.neher  iijion  his  cattle.  This  was  inodi- 
li<  d  to  permit  loans  on  orain  in  the  farmer's  possession. 
'I'hese  niodilicafioiis  of  tlu'  act  were  advocaied  by  mem- 
h(  IS  of  parliament  from  rural  eonstii.u  ncit's.  especiallv 
from  constituencies  in  the  West.  (Generally  sj)eakin^. 
tlu  country  <lisfricts  .lave  found  most  fault  with  the  act. 
It  was  said  that  the  cities  were  bcino-  I)i;i|t  ii|,  ;,(  {j,,.  (.^. 
p'  iKc  of  the  i-iiral  districts:  and  that  the  merchant,  the 
w  hol(  >al(r.  and  the  manufacturer  w  t  re  recei\ing  bene- 
lils  in  which  the  farmer  could  nr*t  participate. 

That  the  I'.irnicrs  could  not  secure  ad\ances  u|M)n 
urain  and  cattle  still  in  their  |)os<;ession  was  (juite  true: 
I'll!  (hat  they  were  not  furnished  with  sullicicnt  bankin<>- 
ncomiiiodaiion  ofhei-wivc  dots  not  seem  to  have  been 
I  lair  eliaiL;c  against  I  he  banks,  '{'he  banks  ha\c  natii- 
I  lily  rrfiis((l  to  advance  tlu  in  mon<y  to  be  iincsted  in 
'i\<d  capital  form  land  and  buildinos  but  tluv  lia\  e 
ilway-  pro\  ided  nioiiev  for  working  capital—  tnachinery. 
lools.  scrd.  etc.  on  nasonablc  security.  In  the  Ka.st 
tli<'  lariiieis  are.  as  a  class.  d(  positoi's,  \\{^\  borrowei' 


In 

Al   the  investioation   be- 
Me    th<     (  ommiltee    on     Hanking    and    Comnierce.    in 


W'esl    the    re\  el- 


se  IS  lru> 


*  ii 


■'ii 

it; 


111 


KJO 


.M()M:V    AM)    I{.\M\IN(; 


tn 


*¥il 


.April.  1!»1.'}.  Sir  l^diiiiind  \Valkcr,  l^-(\si<lcnt  of  the 
Canadian  Hank  of  (."oiimieive.  stated  that  at  TJ-J 
hi-aiu'lics  of  this  hank  in  the  middle  or  |)rairie  prov- 
inces, farniers"  deposits  amounted  to  .S2.H(>!>.'.>2»>.  and 
loans  to  si.'J.().'{.).7Sk  Moreover,  wjiilc  in  former  davs 
in  the  oldt  r  provinces  the  hald^s  waited  until  a  eom- 
mimity  had  a  population  of  two  or  three  thousand  hefoiv 
oi)eninu  a  hraneh.  at  the  |)resent  time  hanks  o(,  j,,  with 
each  railway  division  in  the  \\'(  st.  and  are  ready  to  do 
husiness  with  the  lii'st  stoi'ekeeper.  In  tlx'  Peace  ]{\\vr 
disti-ict  h;!nl>s  are  to-d.iy  many  miles  in  advance  of  the 
railways.  It  i'^.  on  tin  avcra^i'.  two  or  three  vcars  he- 
fore  these  hanks  can  l>e  exiK'cted  to  pay. 

The  new   terms  of  the  act.  under  which  the  I)anks  ma\ 
make  advances  to  farmers  on  tlu'ir  ,yi'aiii.  w  ill  hr  of  urcat 
henefit   to  the   West,      '['he   farmer  has  heen   (om|)ellcd 
hitherto  to  close  his  (jnancial  year  :d)out  the  tirst  of  \o- 
vemhei-.      This  is  heeause   the   Wist    is   a   hiu'  })Oi'i-o\\  iu" 
count  IV    ;uid   is.  to  ;t   |;,ro(.  rxlciit.  dependent    upon   the 
an-ricultural   impleriK  nt   makers  for  credit.     These  coin- 
l)anies.  in  s(  llin<.-  (,,  H,,.  farmer,  have  made  notes  of  the 
latter  f.ill  due  Xovcmhcr  1st,  c'lch  year.     The  result   is 
that    the   farmers  have   Ixvri   compdied    to   throw    tlicii- 
produce  on  the  m.irket  in  the  months  of  .Sepiemher  and 
Octoher.  as  soon  a-    the  ur;,i,,  js  threshed,  to  secure  the 
necessarv   nmney   to   mci  t    ih.lr   payments.     Oiu-  i-csult 
of  thi'  unfoitnnate  state  of  alfairs  has  h. rn   that    Can- 
•'"'•'   'i''"^  'I'K'   '"  lace  ;i    Mr.ain   hlockade  each   vear.      The 
f'ln.K  IN  li.ix,    had  to  throw    IIk  ir  ^rain  on. the  market  at 
•■'   '"'"■  ^^'i<"   i'   would   hrin.u'  fli''  smallest   pric<'s.      Th<' 
new     Icuisi.atiori    v\ii|    make    it     possihje    to    h,.rrow.    on 
thr(sii(d   uram    in   their   possession     for  two.    three  and 
f"iir  months,     'n,,    m;,iri  uill  ||,ns  lie  shipped  out   or;id- 


CANADIAN    HANK!N(;    SYSTEM 


4;u 


iijilly  ,'1(1(1  al).sorl)c  1,  as  rc(niirc(l  ii  (lie  world's  markets. 
At  the  ;,ame  time  the  farmers  will  he  in  a  hetter  position 
tn  ])ay  their  maehiiie  and  store  hills  as  these  heeome 
line.  They  will  he  [)Iace(l  on  terms  inore  nearly  ap- 
I'lnaehinn-  .(inalify  with  the  wholesakT  and  the  manu- 
facturer than  they  lia\e  heen  in  the  past. 

.")17.  Inlcnial  hmik  inspcvtiou. — At  the  last  revision 
of  the  act  the  ^rt^neral  puhlie  were  more  eoneer?ied  in  the 
indhlem  of  an  a(ie(|uate  system  of  inspeetion  tluui  in 
anythm^r  v\sl\  'V\w  immediate  rea.son  therefor  was  the 
disastrous  failure  of  the  Farmers"  liank  Mhieh  oamhled 
it-;  resources  o?i  the  Keeley  i.tine.  I-'or  several  years 
pieviously.  however,  there  was  a  strong-  demand  for 
sniiK"  system  of  external  inspection  of  tiie  hanks,  the 
prineipal  advocate  of  this  iiuiovation  hein«r  Mr.  II.  ('. 
McLeod.  late  general  manager  of  (he  Hank  of  \(/^a 
Scotia.  In  response  to  the  <4'eneral  demand  several 
hanks  of  their  )\\ii  accord  estahlished  a  shareholders' 
■ludit  in  addition  to  the  ordinary  internal  examination  of 
'he  hank. 

In  the  act  as  revised  the  hanks  still  retain  their  fornu  r 
system  of  insjx'ction,  which  is  now  sii|)pUiiiented  l)v  a 
shareholdeis"  audit.  The  hanl.s  will  continue  to  place 
rliief  reliance  upon  their  own  ins|)e;'tors,  the  mineral 
niana/r(-r,  and  the  hoard  of  directors.  Thev  expect  verv 
little  in  the  wa\  of  results  from  the  shareholder^'  audit, 
riic  ki'ynoti'  o  ■  the  ornani/.ation  of  Canadian  hanks  has 
iluays  hern  the  centralizatinu  (»f  rcspo.isihilitv.  The 
general  manager  is  jiractically  supreme.  He  lia->  an 
irmy  of  employees,  jdl  of  whom  hut  two  or  three  ha\c 
l"<n  placed  in  their  positions  hy  him.  Althou-^h  the 
'"•ard  of  (jn'eci(.rs  are  leualls  aho\c  him  in  autiw.ritv. 
"  I>r<sent:n^r  ;is  tlity  d..  tli<    shareholders,  yet   his  power 


-  >i 

m 


I 

•fill 

m 


■•  H 


\'f. 


tm 


m 


432 


M()M:V    AM)   HANKING 


h 


is  practically  unlimited.  Tlic  <4ciieral  manager  of  a  Ca- 
nadian hauU  knows  so  niiicli  more  about  actual  business 
conditions  tliat  Aviicrc  there  is  a  contlict  of  o})inion  l)c- 
twciii  liiin  and  the  directors  the  latter  usually  bow  to 
his  judf^ment.  lie  is.  as  a  I'ule.  assisted  by  two  or  three 
officers  a))])ointe(l  i)y  the  directors.  mIiosc  business  it  is 
to  aid  the  general  manager  and  su|)j)lement  whatever 
information  may  In  re(|uired  of  him.  The  chief  ac- 
countant is  expected  to  know  (piite  as  niui  h  about  the 
banks  affairs  as  the  general  mana<ifer  himself,  and  is 
ol'ien  prt'sent  at  the  board  meeting's. 

'I'he  chief  appointments  made  I)y  the  freneral  maiiager 
are  Ihoseof  the  mana^^trs  of  the  branch  banks.  A  lar^e 
branch  is  i?i  daily  couunimication  with  tin  h  id  office. 
either  by  uii-e  oi'  liy  letter.  They  are  ol  ;i<^  d  to  conduct 
their  business  in  coid'ormity  with  ■  rtain  reyidations; 
but  aside  from  that  the  branches  ai'(  manatred  as  ijide- 
pendent  batdss.  They  mu-t  fuinisb  \\eekl\  accounts  to 
the  head  oflice  if  all  loans  and  disc  iints.  and  at  the  end 
of  caeli  month  a  detaili'd  statement  of  '-esources  and  lia- 
bilities, with  a  description  of  all  cn!lat(  lal  security  iield. 
The  branches  are  ins|)i'cfed  at  irrej^^ular  intervals  l)y  offi- 
cials ap|)(iinted  by  the  ^enei'al  manaj^er.  These  men  are 
tliorou^hh  c()m|)etent.  have  had  years  of  baid'vin^  expe- 
rience, and  are  in  i-eceipt  of  larj^c  salaries.  They  are 
cxpii'ts  '\  hn  pi  ri'orni  their  work  with  a  deep  sen  '  of 
the  i-espniisiiiilitie^-  iuxoived.  AN'hcn  their  reports  aic 
s(nt  in  tlii\   are  dealt  vvitli  b\   the  administration  of  the 


rtank. 


iV  I'onen  te  example  of  the  cost  and  nature  of  the 
wnrk  in\(il\(d  is  found  in  the  msjxctioii  of  the  .'{?<• 
branehrs  of  the  Canadian  Haid<  of  Commerce  in  \\)\'2. 
That    bank   em|)loyed    i't)y   this    work    I  !■   officers  of    the 


A 


CANADIAN    1{\NK1N(;    S\STi:.M 


433 


lii^licst  ;»ra(le  whose  salaries  amounted  to  $4().()()()  and 
,1  lar^c  iHimhcr  of  ordinary  audit  olliccrs  and  assistants 

.lose  salaries  amounted  to  sm.hoo.  In  addition  there 
were  many  elerixs.  steno^raj)hers  and  messen<i;ers  em- 
ployed at  a  total  eost  of  $8.{)()();  travellini,'  expenses 
\uie  .$2.'}.()0() ;  and  eliar<4es  for  rent,  lif^lit.  ])osta«r(.',  sta- 
tionery, ete.,  eame  to  ^i:j. ()()().  makin,(r  a  total  eost  of 
^M)'2J(\'2  in  one  year  for  one  insjx'etion  of  this  hank. 
Tlie  head  ofHce  as  well  as  every  hraneh  hank  is  in- 
speeted. 

As  far  as  the  puhlie  is  coneerned  it  has  no  means  of 
i'ld^'in^r  the  standing'  of  a  hank  except  hy  the  monthly 
returns  puhlished  hy  the  hanks  according-  to  the  require- 
ments of  the  law.  These  returns  are  fairly  eomj)rehen- 
sivc.  and  have  heen  made  more  so  !)v  the  revision  of 
ini.'J.  They  will  l)e  deserihed  in  Chapter  XXXII, 
The  minister  of  Hnanee  may  call  for  sui)|)lementary  in- 
formation from  any  hank.  \\!ienever,  in  his  jucl^nient, 
"^iieh  is  neeessary  to  afford  a  complete  knowledne  of  its 
■  ilfairs.  Of  course,  these  returns  can  !>e  taken  only  for 
"hat  they  are  worth.  In  the  case  of  several  of  the 
failed  hanks  they  have  heen  made  with  evei-y  decree  of 
falsification,  heeause  no  independent  eheekin^r  of  figures 
^vas  possihle. 

.■)1H.  Hank  failures  in  (\ina(Ja. Thwc  have  heen  a 

I   mher  of  disastrous  haids  failures  in  C  anada  since  Con- 

lederation.  the  most   imjinrtant  heino-  tho>e  of  the  ]']\- 

■lian^rc,  Ontario.   Soxerei^^n  and    1  armers"    IJanks.      In 

•lie  ease  of  the  Ontario  and  the   l"a'  n<  rs'   IJanks  there 

\<  re  no  losses  to  citln  r  note  holders  or  depositors.      The 

Ontario  was  tnk.ti  over  hy  the   Hank  of  Montreal  and 

liquidated  hy   that   insiiliit  mn.     The  Soxcreinn   was  ah- 

-'•rhed    hy   ;t  .<4r<  -ip   ol    hanks   which   (ii\id((|    its   otlices 
(•-VII— js 


tit 


'€ 


i;u 


MONEY    AM)    n.WKIXG 


aiiinii^  tlicm.  accoulin^  to  districts.  This  was  done 
partly  in  st'lt'-dfrciicc.  to  jireveiit  a  <j^eiK'ral  ])aiiic.  Tlic 
mere  siii)ersc'rii)tioii  ol'  tlie  words  "Bank  of  Montreal" 
on  the  bankin^v;  house  of  the  definiet  Otitario  Bank 
stopped  a  run  on  that  institution  almost  immediately. 
The  Farmers"  liaid<,  however,  was  left  to  its  fate. 
l'"rom  the  start  several  ])rominent  finaneiers  liad  oh- 
jeeted  to  the  "rantiny,-  of  a  eharter  to  this  hank:  and 
the  sudden  eollaj)seof  its  reekless  career  in  hi<2;h  finance 
aj)p.irently  occasioned  little  or  no  surprise  to  the  l)ank- 
ers  of  the  country. 

Mr.ny  unfair  com])arisons  have  been  drawn  ])etwepn 
hank  failures  in  Canada  and  in  other  countries,  partic- 
ularly the  Cnited  States.  Since  Confederation  eleven 
hanks  have  failed  in  Canada:  hut  it  must  l)e  borne  in 
mind  that  not  all  of  these  could  iiave  been  chartered 
under  the  present  act.  Even  so,  the  true  perspective  is 
not  secured  by  reference  to  mere  numbers.  This  is 
secured  only  by  comparing'  the  total  assets  of  the  failed 
batd<s  since  C'otd'ederation  with  the  total  assets  of  the 
banks  as  they  exist  at  the  prcKiit  time.  This  is  obvi- 
ously the  oidy  correct  method  to  follr)w.  since  Canada 
possessivs  few  banks-only  twenty-toin-  in  r.)i;i  and 
tlurefoic  a  reference  to  mei-e  numbers  ixives  a  uro- 
tes(|ue  view  of  the  situation. 

Sir  Edmund  Walker,  in  a  statement  snbinittcd  to  the 
Banking'  and  Commerce  Committee,  has  admirablv  snm- 
mari/ed  the  situation  as  follows: 

I.   Total  ass(l^  of  Canadian  banks  which 

have  t'aikd  simn    Conftdc  I'alidii         .  $77.780, Hi* 

*J.   'I'otal  assets  of  Canadian  banks  as  on 

December   .'{l,    1!)12 1,.VJ().()H1.1.-,S 

.'}.  Total  liabilitie-s  to  the  publie  of  Cana- 
dian banks  a^  on  December  .'{l.  IHl'J.  1  .•_>!»•_*,}. *>!  .1. ST 


(  ANADI.W    HANKIN:;   SVSTKM  435 

4.  Total  losses  l)v  cirditors  ( c\clii(linir 
shareholders)     from     hank     failures 

since   Confederation G. 000.3.57 

.').  Total  losses  hy  creditors  throu<)h  fail- 
ures of  hanks  which  coidd  have  !)een 
organized   under  the    present    Hank 

Act    iMTO.'XIf) 

And    these    consist    of    -t    hanks; 
losses  hy: 

Exchann-e  liank •$.574. .)87 

Central  liank 7.08.'J 

St.  Jean  Bank 200.088 

Farmers"  Hank 1.208.:U)8 

3.  Percenta<^e  of  total  assets  of  faik'd 
hanks  since  Cotifederation  to  the 
t(»tal  assets  of  all  hanks  on  Decemher 

•^1-  li»l-'   5.09 

7.   Percentage  of  totnl  losses  hy  creditors 

to  total  assets  of  all  failed  hanks.  .  .  7. 830 

H.    Pei-ceiita^'e  of  total  losses  hy  creditors 

of  failed  hanks  to  total  assets  of  all 

!)anks  oi    l)eceml)er  31.  1012 .3001 

0.   Percentage  of  total  josses  !)y  creditors 

throu<ih     failures    of    hanks     \\hieh 

could  ha\('  hcc!)  or<iani/c(l  under  tJie 

l)resent  Hank  Act  to  total  assets  as 

on  Decemher  31.  1012 A  VJC> 

These  comparisons,  of  course,  do  not  take  into  ac- 
count the  \ei-y  laroc-  losses  hy  shareholders.  Hut  from 
that  point  of  \  lew  it  may  he  said  that  in  Canada  there 
iiave  heen  less  failures  in  hanking'  than  sn  any  other  field 
of  cnter|)rise.  Moreo\tr.  it  should  hi-  notid  that  it  is 
scarcely  worth  wiiile  to  make  comparisons  he'.ueen  fail- 
ures in  hanking  in  Canada  and  in  otiiei-  countries.     In 


i-i 


m 


m 


un> 


yH)Sl.\    AM)    HAMvlNCi 


i: 


tlic  case  of  the  I'liitcd  Slates,  lor  exaiupk',  \vc  would 
h-dve  to  take  into  eonsideration  the  State  IJanks  and 
Trust  Cornpauies  as  well  as  the  National  Hanks,  where- 
as in  Canada  there  is  hut  the  one  systeni  of  hankin^. 

However  that  may  he.  the  ])eo])lc  of  Canada  wrrr 
thorou<ih!y  aroused  over  the  rec-ent  l)aid<  failuirs,  and 
particularly  over  the  C()llaj)se  of  the  I'arniers'  Hank. 
It  WHS  due  more  to  the  failure  of  that  institution  than 
to  any  other  cause  that  a  demand  was  made  for  some 
sort  of  independent  examination.  K\eii  thou,uh  in  tin 
ease  of  the  L'armers"  Hank  the  dej)ositors'  losses  were 
assumed  hy  the  ^ovei'iiment.  tiu  re  is  r'  >  disiiuisin^'  the 
fact  that  such  losses  eventually  must  he  sustained  l)\-  the 
country.  They  merely  ])lace  the  ^ox  ei-niiieni  in  ilie 
place  of  the  depositois.  and  that  mainly  foi-  |)olitieal 
reasons,  \e\ertheless.  when  all  the  tacts  are  consid- 
ered, it  seems  (|uite  evident  that  the  Treasury  Hoai'd 
never  should  have  ui-anted  a  certificate  to  the  Faiiners" 
Bank  permitting'  it  to  heyin  huslncss. 

.■)11).  Slnirf/ifjhlrrs'  (iiidif. — As  a  result  of  the  demand 
for  inde])end(.'nt  examination  of  the  l)atd<s.  it  was  pro- 
vided in  the  rexision  of  the  act  in  191.*}  that  the  share- 
holders should  ap])oint  auditors,  at  each  ^enei'al  meet- 
ing, from  a  ''st  of  not  less  than  forty  names  selected  by 
the  whole  i(.,(.y  of  ^'cneral  mana<4'ers.  suhject  to  the 
apj)ro\al  of  the  minisUr  of  finance:  with  the  furthei- 
resei'vation  that  one-third  of  the  ^lockholdei-v.  if  dis- 
•  ttisfied  with  the  auditor  appointed  l)\-  the  ma  joritv, 
nsay  ap])eal  to  the  jm'nistcr  for  anotlu'r.  This  mdliod 
\\as  largely  based  on  the  i-ecoinmendations  of  .Mr.  II.  ('. 
^rcLeod.  The  auditors  must  thoroughly  examine  the 
books  and  accounts,  cash,  securities,  docnmenis  and 
\()uchers  of  the  l)a?d<.  In  addition  the\'  are  empowered 
to   !'C(|uire   from   the  <lirecfors  arivi   olliccrs  of   the   bark 


CANADIAN    J{ANK1N(,    S\  h  Tl'.M 


V, 


X 


Slid)  inroriiiiitioii  and  explanation  as  inav  Ix.-  lU'cessarv 
\'ny  tlu  j)i-()iRr  ])(,  i-lorinancT  of  Hkmi-  (IiiIkn.  Tlirv  are 
allowed  access,  too,  to  the  returns  of  the  i)i'anch  hanks 
s(  III  to  the  chief  oflice;  and  they  may.  at  tlieii-  discretion, 
\  isit  any  hi-anch  or  a^^-ency  for  the  pnrjjose  of  e\aininini4- 
its  l)ooks  arid  accoiuits.  It  is  theii-  (hity,  also,  to  check 
the  easji  and  verify  Hie  secnrities  of  the  hank  at  its  chief 
(illiee;  and.  if  they  deem  it  advisal)le.  to  do  the  same  at 
,iiiy  hraiieh  or  agency.  The  auditors  must  rej)ort  to  the 
sliai'eholders  their  tindinn-  at  the  annual  meeting,  or  on 
any  othei"  special  occasion  th()u<>ht  necessai-y.  In  addi- 
tion, the  minister  of  finance  may  direct  any  auditor 
;;])pointe(l  accordino-  to  the  ])r()visions  of  the  act  to  make 
a  special  return  to  him.  the  service  so  performed  to  lie 
remiiiKraied  hy  the  ^'oN'crnment. 

This  external  examination  of  the  head  office  of  a  hank 
and  its  chief  hi-anches  is  sim])ly  an  attempt  to  do  for 
the  l)ank  what  has  been  done  foi-  years  foi-  the  lar^^e 
iiK-rcantile  houses  and  manufactui-eivs.  A  thorough  ex- 
amination of  the  <ie,K'i'al  ledner  at  the  head  oflice  will 
cover  the  special  re|)orts  and  statements  from  the 
hranches.  It  \v(ni'd  also  test  the  accuraev  of  the  tiuures 
.L;i\cn  in  the  monthly  statement  to  the  go\ernment.  and 
I  he  statements  presented  to  the  shareholders.  The  |)res- 
ident  of  a  Canadian  hank  must  si<in  these  statements;  hut 
the  president,  as  is  well  known,  is  not  in  a  jjosition  to 
slate  tliat  the  tigui'cs  are  e\  en  appi'oximately  coi'rect. 
<)f  coni'sc  the  signature  of  the  .ueiieral  manaj^'cr  is  at- 
tached to  these  slatements:  he  oiinht  to  know,  and  is 
paid  for  knowin;^',  wluthtr  tlu'se  statement>  ai'c  correct. 
Hut  the  added  sionatiii'c  (.f  expert  accountants  will  make 
assui'anci'  doiihly  sui-e.  Xe\  eitheless.  too  much  must  not 
he  ex])ecte(l  IVom  this  system  of  audit.  .\firr  all.  it 
cannot  do  more  than  \erifv  the  fi'^ui'es  ami  statements  of 


m 


^l^s 


MOM.V    AM)   HANKING 


ii  !>iiiik.  It  caiiiiol  jiidoe  „f  tlie  (itiality  of  fhc  assets 
lield  a  fact  of  paranioiint  iniixirtaiUT  luillur  c-aii  it 
ptvvciit  loans  IHJM--  approved  of  by  the  directors.  In 
t\  1 1  y  larnc-  iiridrrtakinn.  resjxMisihility  rimst  finally  rest 
upon  the  directors  and  cliie!"  e\ccnti\ c  oHiccrs. 

.VJO.  ('(inadid,,  IhniJccrs'  J.ssorialioii.  -  TI.  •  Canadian 
Iiaid<ers'  Association  is  an  incorporated  Ixxly  with  \n)\v- 
vvs  and  dnties  prescribed  in  an  amendment  to  the  bank 
act    passed    in    1 !)()().      Kach   of   the  chartered    banks    is 
represented  in  the  meml)ership  and  has  one  vote.     The 
principal  dnties  of  the  association  are  to  apjx.int  certain 
trustees  for  the  central   o(,ld  reserves,   to  snpervise  the 
issue  of  bank  notes,  to  look  after  the  deduction  of  worn 
and  mutilated  notes,  and  to  take  charge  of  snspended 
banks.     The  head(|narters  of  the  association  are  in  the 
IJank  of  Montreal  Huildinu-.  and  its  executive  olHcer  is 
the  secretary-treasnrer.     The  expenses  are  apportione.l 
amonu-  the  bard<s,  and  do  not  constitute  a  very  heavy 
l)in-den.     All   expenses  inenrred   on   account  of  a  sus- 
))cnded    baid<    are   a    charoe   aoainst    thai    bank.      The 
clcarini-'   houses   in    the   I /onunion   are   :.lso  snbject    to 
reonlation  by  the  association.     It  has  ureal  power  and 
prestioe  thron-h   the  conntry,   representing-  as   it  does 
the  opinion  of  the  banks  as  a  whole. 


CHArTKH    XXXI 


CANADI.W    1!ANKI\{;    I'KOHl  IMS 


')21.  Branch  Ixiiih.s  aiul  the  local  coinnuniitti.—  The 
hiaiich  l)ank  systtMii  lias  hccii  snhjec-tc-d  to  severe  eriti- 
v\<\u.  es])eeially  in  tiie  West,  where  it  lias  l)eeM  eharoed 
that  the  hanks  have  not  suHieiently  met  loeal  needs.  Re- 
cently, in  an  attempt,  apparently,  to  meet  tliis  situation, 
two  l)anks  have  heen  started  -the  Rank  of  Vaneouver 
and  the  Weyhnrn  ,'^eenrity  Hank.  No  doul)t  the  heavy 
iinmiiiration  of  Ameriean  settlers  has  had  something-  lo 
do  with  the  a-^itation  for  the  loeal  haidv  as  distinet  from 
the  hraneh  l)ard<.  Nevertheless,  speakinj.^-  for  Canada 
otdy,  the  hraneh  hank  system  has  more  than  justified  its 
existence. 

In  the  East,  certain  agitators  have  attacked  the  branch 
l)anks  on  the  <>ronnd  that  in  the  country  towns  and  rural 
districts,  they  do  not  make  loans  to  ar.y  great  extent. 
Much  of  this  discussion  is  apparently  based  u])on  the 
assumption  that  the  banks  have  to  do  only  with  direct 
customers,  or  at  least  with  those  who  apply  for  loans. 
This  is  obviously  not  the  case.  Every  economii-  institu- 
tion lias  its  direct  relationshii)  to  the  well-bein<r  of  every 
class  in  the  community.  This  is  conspicuouslv  true  of 
the  l)anking  system,  which  su])plies  to  so  large  an  extent 
the  machinery  of  exchange  and  production.  A  good 
banking  system  is  of  as  great  importance  to  the  con- 
sumer and  the  reei])ient  of  wages  as  it  is  to  the  men  en- 
gaged in  the  distributive  business  or  in  mai\ufacturing. 
W'lien  the  baiiking  system  surt'ers.  the  injury  passes  on 

439 


i 


MICROCOPY    RESOLUTION    TEST    CHART 

.ANSI  ond  ISO  TEST  CHART  No    2 


1.0    !?™^  IB 


I.I 


1.25 


136 


1.4 


Z5 

||Z2 

j2.0 
1.8 

1.6 


^    ^pp,  ipn  irvviGE   inc 


-fcOJ        'jS.* 


U() 


MOXIA     AM)    1{\\K[\(; 


m 


^\itll  (•uiiinlat!\c  I'orcL'  tlnoiiwh  \ai-i()us  ('0(jii()iiiic'  <^rou]:N 
until  its  limit  is  rcacli'-d  in  the  ua^c-caniing  and  con- 
suiiiiii^'  I'lassrs  in  tin    fDinniunitw 

'I'lie  small  local  hank  cannot  he  estahlislied  in  Can- 
a(ia  ()\\in.u'  to  the  I'act    that  a  hank   must   have  a   snh- 
scrihed  capital  o!'  at   ha>t  S,5()().()()().  oT  which  S2.)(), ()()() 
must  i)e  i)aid  up  hcfocf  it  can  hcwin   hnsiness.     Should 
the  Hard<  Act  rwv  ^^]\v  authority  Tor  the  or-^-anization 
'»!'  small  hanks,  tlu   proliahl  ■  i-csult  woidd  he  the  ruin  ol' 
the  uiitoi-lnnate  stockholder  and  hea\y  losses  to  the  de- 
positors.    J-'.ven  a  liank  of  sjoo.ooo  could  not  |)r()titahly 
comi)ete  with  the  lar^e  hanks  unless  it  were  estahlislied 
in   a    place  of  '-onsiderahle   size.      Without   hranches    it 
could  not  <^()  into  a  small  place  at  all:  it  woukl  lia\e  to 
confine'   itself  to  a   town    \\liei-e   there  v.onKl   I)e  a   com- 
parati\ely  \:\r<xv  amount  of  imsiness.      Hut   in  all   such 
towns  there  are  three  or  foin-  hranches  of  laroe  haidxs 
competing  for  the  hii^iness.     Deposits  would  undouht- 
edly  \k'  secured  in  the  smaller  placis,  hut  it  ue^nld  he  hard 
to  |)lace  loajis.  espiciaJIv    in  the  smaller  towns  and  rural 
districts  of  the  Ivist.  and  of  Ontario  in  jiarticular.     The 
defunct    I'armers"  Hank,  for  c\ample.  securi'd  S]  i;j.()00 
deposits   in   a    iittk    hamlet   called    Dashwood,    10  im'Ics 
l''"i"   IIk'  h)wn   (if  Clinton;   hnt    it   could   not   negotiate 
many  safe  loans.     TIk  I'c  are  scores  of  such  small  places 
i"  Ontario  in   the  same  position.     A    local   Itnuk  with  a 
capital  of  S|o(!.()()()  or  (v.ri   s-J.l.OOO  (..uld   not  slay   in 
hnsiness  in  such  places,  for  Ihi'  e'apital  could  not  he  used 
unless  it   wt  re  s.  nt  out  of  Ihc  coinitinnitv.     'I'he  people 
ill   these   places  are   wcll-|o-d...  and   aic   d<  posilors,   not 
horrowers.       Hnl.    iir\  ,||  hek-s.    i|    is    (uilv    thi'oii-^h    the 


'*t»^ltltlll      IMMM         MI>mMt* 


I,,.,..,.!,      !:•!!;!.   ^      •   h:!       I.   \.,         '.'..::        \. 

loans  a"  fair  rates.     Otheruisc.  thev  are  ohli^cd  to  turn 


CANADIAN    BANKING    P1{0HL1:MS 


111 


'-HP 


to  ])rivatc  hankers  and  money  lenders  ulio  eliarge  liigli, 
almost  exorbitant,   rates. 

Mr.  J.  B.  Forgan,  president  of  the  First  National 
Hank  of  C'hieago.  gave  some  very  illuminating  evi- 
('(iice  on  this  jjoint  before  the  Committee  on  Hanking 
and  C'ommeree  at  Ottawa,  in  ^\i)rii.  l'.)l.'{.  He  ex- 
plained that,  as  a  rule,  the  loeal  Iniwk  was  organi/ed.  in 
tiie  I 'nited  States,  by  loeal  bori'owers,  who  wanteil  to 
utilize  its  funds:  and  that  it  was  ecjntrolled  by  those 
borrowers.  Loeal  bankers,  a?  a  I'ule.  wish  to  elitig  to 
tlieir  authority  over  loeal  financial  matters.  Sir  Va\- 
iiimuf  Walker,  testifying  before  the  sub-committee  of  the 
Hanking  and  ("urrcney  Committee  at  Washington  as 
to  the  alleged  supei'iority  of  the  local  o\ ci-  the  branch 
bank,  said:  "It  is  one  of  thosi-  popular  \  iews  that  is 
repeated  o\er  and  o\er  again,  but  !  am  (juite  positixc 
that  under  the  branch  system  we  ser\-e  the  customer  bct- 
lir  than  the  local  baid<  can  do."  'I'he  local  bank  is  too 
a|)f  to  get  into  a  iMit :  to  serve  the  interests  of  a  i)articu- 
lar  set  or  clifiuc.  The  big  chartered  banks  of  Canada 
can  afl'oi'd  to  take  an  impci'sonal  point  of  view.  Mr. 
Meeker,  of  l*rinceton  Fniversitv.  follow  inu'  Sir  Kd- 
iiiiind  Walker  befoi'c  the  same  committee,  said:  "The 
local  baid\cr  is  not  so  well  able  to  furnish  the  necessary 
ci-cdits  in  his  loeal  community  as  is  the  managci'  of  the 
liranch  of  a  larger  bank.  The  loctd  banker,  moicoxcr. 
■-  likely  to  fa\()r  ceitain  infci'csts." 

.")•_'*_*.  ('(nicitilrntion  of  rcscn'ts  in  liranih  Ixiiihs.  One 
o\'  the  chief  i-caso?)s  w  by  the  branch  banks  lia\  r  bccu  able 
to  a\i)id  a  uidc-spread  linaneial  panic  lia.>  Imii  because 
"I  tbcii-  control  n\'  rcscr\  I's.  Canadians  ri'gard  as  waste- 
I  111,  dang  (roils  and  unscientific  tin  maimer  in  w  bicb  each 
"I  more  than  I'T.OOO  banks  in  the  I  'iiif<  d  Slates  iindei- 
iiiok  lo  control  its  own  legal  reserves.      I'Ik  \    !ecoi,;ni/(.- 


ni 


til 

i  11 


Ui 


MoNKV  .KM)  BA.XKLWi 


iff 


fliat  whenever  aiiythinn-  oeeurs  to  shake  pnbhc  Ponfi 
(leiiee  the  hanks  nnist  he  the  first  to  take  ahinn  wheii 
these  are  h)eal.  and  independent  of  one  another.  At 
sneh  a  time,  in  tlie  ( 'nitid  -States,  eaeh  hank  jjroeeeded 
to  sti-ennthen  its  own  casli  reserves,  hy  enrtaihn^'  ere(h'ls 
an(i  eonvei'tino  its  h)ans  into  cash.  The  result  was  that 
the  ;^()hl  snp])ly  of  the  eountry  was  (hstrihnted  anionu 
27,000  !)anks.  instead  of  i)ein<i'  niohih/.ed  and  controlled 
at  strate<iie  points.  IIai-dly  a  hank  in  the  lot  could 
meet  all  demands  upon  it:  so  cash  payments  were  sus- 
pended or  seriously  restricted.  In  Canada  the  hanks 
havf  not  suspended  ea>-'  payments  since  the  C'ord'edera- 
tion.  This  has  heen  due  in  larye  measure  to  the  fact 
that  the  cash  re(|uirements  of  each  district  are  cared  for 
hy  the  head  oHice. 

.)•_>;{.  XiiHihcr  (if  hfiiih.s  l(,  iKipiildtioN.  It  has  somi- 
timcs  hctn  said  that  the  Canadian  chartered  hanks  do 
not  providf  sulHcienl  hranclies  to  meet  the  needs  of  tlu 
people.  This  is  not  horne  out  !>y  the  facts.  Aecoi'dini; 
to  a  \ciy  careful  statement  |)re|)ared  hy  Sir  Kdmund 
Walker  and  sul)mittt(l  to  the  ("oiiimittee  on  Hankinu 
and  Commerce  in  .\piil.  I'.d.'J.  there  is  one  haid;  to  each 
2. HtT  of  the  population,  in  the  ('nited  Kingdom  there 
is  (»ne  liank  to  each  .kIK".  persons.  In  iMi^land.  alone, 
there  is  one  hank  to  each  ,").l.-J!t  of  tlie  population.  In 
Scotland,  where  the  luaneh-hank  sysli  ni  exists  in  the 
most  com|)|(te  form.  thei-e  is  .mt  hank  to  each  L'.ior, 
P<"1*'<'-  '  "  !''<■  '  iiited  Stales  there  is  one  hank  to  eacii 
•'ktM)  of  the  population.  Scotland  is  the  onlv  countr\ 
w  hieh  exceeds  Canada,  .ind  it  d<ies  xi  heeaiise  ot'  il  .  mor( 
hi^^hly  de\(  lo|)((l  i»raiieh-lianlsin<4', 

.\nolh(r  useful  comparison,  althouuh  too  much  must 
not  he  nd'erred  from  it.  may  he  made  h\  comparing'  cer- 
tain cities.    Hiisloi.  in  l''nuland.  has  a  p<)|)uIalion  much 


CANADIAN    l{ANKIN(i    I'UOnLl'.MS 


u:) 


tlic  same  size  as  Toi'.Jiito,  .'{oT. <>()(>.  It  lias  one  haiilv  to 
.").(!7+  persons.  Toronto  lias  one  hank  to  •J..'}.j4'  of  its 
|)o|)iilation.  C'ineinnati,  in  the  Tnited  States,  lias  one 
fMiik  to  9,125.  On  the  other  ha'.d.  Detroit  has  one 
lank  to  1.100.  Takinj^'  Canada  as  a  whole,  there  is  in 
the  cities  one  hank  to  e\  ery  .'}.000  of  its  population:  in 
tile  I'nited  States  there  is  one  hank  to  every  9,000  per- 
sons. 

A  point  that  should  not  he  overlooked  is  that  some 
.inters  of  ])opulation  are  \ei'y  liea\y  jjorrowcrs  of  capi- 
tal, while  oidy  small  deposits  ai'e  reeei\  id.  These  jjlaces 
consist  of  the  husy  mannfaeturin;^'  centers  as  distinct 
tVom  the  haekward  or  rin-al  distiict.  Such  place-:  con- 
sist of  Herlin.  in  Ontario,  with  a  hundred  manufacturinu' 
I  ^tahlishments.  (,f  which  ei^ht  are  \cry  lar^e:  Hrant- 
iiii-d.  with  si'xcnty:  Peterhoro.  with  thirty-ti\ c:  (Juelpli. 
\Mtli  sexcnty:  Sarnia,  London,  and  so  on.  It  is  \(rv 
(ionl'fful  whether  local  capital  could  ha\e  taken  care  of 
these  places;  certainly  local  deposits  could  not  ha\e  done 
•><).  'i'h.eir  prosperity  and  "growth  are  due  in  lar^i'  meas- 
ure to  the  ahility  of  the  ^rcat  chai'tered  haid<s  to  furnish 
the  re(iuisite  capital  hy  oatliei-in<4'  the  funds  of  savinn'  dis- 
ti-icts  and  pourin<4  "  sti-eam  of  capital  into  the  cities  and 
ttiuns  where  men  of  foresiohi  and  irilerprise  are  ahle  to 
f'liild  up  (loui'i>>hin^'  industriis. 

.")•_' !■.  l)(/i()sll  iiirrincii  in  ('(iiniihi.  There  has  hcen  a 
la r«>'t' and  steady  growth  of  d(  posits  in  C'an.-idian  hanks 
\\iHiin  the  last  decade.  The  de|)osits  stood  on  May  .'{I, 
r.ti:}.  at  the  urand  total  of  $1 .09-_'.H.50,  Mil- a  sj)len(lid 
Niiowin<.i'  for  a  new  country  whose  resources  are  onlv  hc- 
uinnin^'  to  he  de\i!o|ied.  These  deposits  wcic  niade  u|) 
of  $.'J(>4.1.)9.<ill'.  paxahk-  on  demand  in  Canad;!:  !^<'>.'<0_- 
7  ■»,"). CO,'}.  IcchnicalU-  pa\ahk'  after  a  lixid  dale  hut  <>(  ri- 

illy  paifl  on  diiuanil:  and  ><'.>7.9.'{.').2iri,  j)ayal)le  else- 


tu 


MOM.V    AM)    H.WKINd 


ii   ' 


t^^ 


IL' 


where  than  in  (";uia(hi.     On  the  same  (hite  there  weiv 
.$l()lM)!>7.!>;i(;  or  notes  in  eimilation. 

In  Cana(hi.  anion^'  Icoishitors.  far  less  attention  ha.^ 
l;<-en   oivrn   to  (lf])osits  than   to   note  issnes.     This  has 
hicn  (hie.  pei-haps.  to  the  east-  of  ie,nislatin,u'  npon  nole 
ivsnes  as   eonii)are(l    uitli  dcijosits.   and   heeanse   of  the 
e()nij)arative  sparseness  of  popnlation.  taking-  tlie  eoun- 
try  as  a  wlioju.      In  \hc  rnrai  (hstriets  and   amon-  {1,,. 
w()rkin<i'  ehisscs.  tlie  hank  note  and   the  Dominion  note 
are  the  ehiit'f  tnech'nm  of  exehanuc.     Hnt  there  has  hccn 
a    very   ratud    <4ro\\th   ol'   deposit   enrreney   amono-   t!ie 
cominereial  and  hnsiness  ehisses  in  the  towns  and  eities. 
The  o-rowtli  of  deposits  has  heen  ont  of  ail  projjortioii 
to   the  oro\\th  of  hankino'  eajiitai   and   to  thr  (Uianlilv 
of  notes  issnt'.k     This  highly  ellieient  enrreney.   repir- 
sented  l)y  depositors'  elieeks  ayainst  (h  posits,  is  present 
in    hiro'e   amonnts  -  inneh    hn-yci-    than    any    other   nu- 
dinm    of  exehanue.      Tiie   (inahly    which    eharaeteri/.es 
it   in   a   pi( -eminent   dv^^nr  is   its  elasl  icily.      It  athipts 
itself*  to    the   (hinand    of    (he    momeiil    witlioiit    \  isihir 
effort,  either  hy  ex|)ansion  orcontiaction.as  the  ease  mav 
lie.      And    it    does   this  (jnite    irrespective   of    ki>ishiti\e 
pin-pose   or   unidance.      In    view   of   the   extraordinarv 
•growth  of  this  kind  of  cre.jit  eiirreiu  y.  the  (jiiestion  of 
the  amount  of  hank  notes  in  eirciikition  <iiiks  ahiiost  to 
insionilJe.Miice.      Of    course,    there    remains    the    .yraver 
•  piestion  as  to  whether  tlie  .u'ox  erimieiit  slioiild  interfere 
in  th<'  amount  and  kind  of  currency  iiicded  hv  liie  peo- 
!''<•      -^t   tlie  revision  of  the  act  in    IIMM  a   nivat  (kal  >>( 
eritielMn     ua^    (hrected    at     tii<'    i>^slle    of    ;.    eircidat  inu 
medium  of  (Achaiiuc   liy    tlie    lianks.    instead    of   li\-   tli^ 
.government.     It  seems  cl.ar.  liowcvei-.  th.il  Ihe  nHdJin.! 
of  exchange  should  he  made  up  of  the  kinds  of  monev 
I  KJst    convenient    for    the    use   of    the    commiinitv,   ami 


(ANA  1)1  AN    HANKIXC.    rUOHI.I.MS 


41.> 


ilividcd  hctwcfii  tliese  kinds  in  Ww  proportions  niost  cou- 
wwk'vA.  uIu'tlRT  tlu'sc  1)0  (k'])o.sits  oi-  hunk  notes.  \o 
i(<>islalurc.  and  no  conclave  of  hankers,  i-an  determine 
llic  amount  i<\'  notes  needed  IVom  yeai-  to  year  in  the 
'  \(han,iies  of  tlie  country.  The  oidy  rational  process 
-  to  pei'inil  the  liaidss  to  extend  acconunodat ion  either 
li\  a  deposit  account  or  in  hank  notes,  as  the  customer 
disires. 

While  the  deposit  currency  is  almost  an  ideal  medium 
i!  (  xchanu'c  in  the  urhan  ceiders.  \'et  the  cost  to  the 
Ii.iiik  is  larmier  than  is  ordinarily  su])posed.  In  fi^urin<j: 
!li"  cost  it  is  necessary  to  include,  in  addition  to  the  cost 
"I  the  clerical  \">()rk  in\<)l\ed.  the  cost  ol'  supcr\ision  of 
liii'  mana^ii'  and  accountant,  as  well  as  an  apportion- 
fiK  i:t  ot'  the  I'cnt,  stationery,  liyht.  heat,  \ault  and  safe 
i(( omniodation.  and  also  ef  the  head  ollice  expenses. 
I'.ven  if  oul\"  the  salaries  of  the  men  actually  en^a^'cd  in 
iinndlin;^,'  checks  and  dejjosits  ari'  considered — the  teller 
tiid  ledu'er  keeper  the  cost  per  cheek  amounts  to  no 
Micon-idirahle  sum.  It  is  also  seldom  reali/ed  that  a 
cluck  form  on  safety  paper  costs  the  hank  i)et\\een  $- 
;iiid  S'_'.,")()  pel'  thousand,  or  practieall>  one-cpiai'ter  of 
.1  cent  each. 

( )f  course,  in  i\  cry  hraneh.  no  niatter  hoAV  small,  there 
;u'e  certain  lixed  charucs  to  maintain,  irrespective  of  the 
'iii^iness  done.  A  new  hi-anch  for  several  years  aftt'r 
lis  opening',  has  men  and  machinery  to  spare,  and  can 
li.indle  small  at'counts  withoid  any  additional  expense. 
I !  is  only  w  hen  the  husine^s  has  increased,  and  mori  men 
Mid  acconimod;ii  ion  are  i'e(juired.  thai  many  small  ac- 
■lunts  ma\  lie  liindt  i(som<'.  This  explains  \\\\\  some 
!\inks  enconrau.c"  small  checkiuij:  accoimls.  'i'lie  opcninu 
if  these  accoimts  enal»le>  the  manaifcr  of  lh<'  haul  to 
!ii  I'oine  ■ic(|uaititcd    with   his    neiulihor'-,   ;tnd    frccpiciilly 


m 


IS;,: 


iW 


MO\i;v    AM)    HANKING 


a  small  acroiint  may  turn  out  profitable  or  hriiifr  desir- 
al)!f  conti-ctioiis.  It  may  he  said,  however,  that'^in  last 
analysis,  no  aeeount  is  protitahle  or  valnahle  unless  tin 
ineome  exceeds  the  expense  of  keepin-'  it.  In  revieuiiii. 
;iii  aeeonnt  the  minimum  weekly  halanee  is  the  on, 
that  determines  the  loanino'  value  of  the  deposit  to  ;i 
liank. 

.'yj.'i.   Cnticisiii  (if  htiiih--i/()tc  m/zcv. The  note  eiren- 
lation  of  Canadian  hanks  on  May  .'Jl,   l!»i:{.  was  Sio-j.- 
JM)7.9;}»i.    This  circulation  has  been  denounced  hy  certain 
Henients    throughout    the    country    as    heino^  "a    prac- 
tical uin  from  the  oovernment  to  the  hanks  (7|'  over  one 
'"""'•■<■''   I'lillion  dollars.     This  criticism   has  found  ex- 
pressi()n  hi  such  organs  as  The  Farmrr.s'  Advocaic  and 
The  (intiu  drowcrs'  (in'idc.     It  is  complained  ,nat  tlii^ 
c'lirrency  is  not  subject  to  a  tax  of  any  kind,  as  is  the 
case  in  some  other  countries :  and  that,  moreover,  instead 
<»r  l)ein,M'  secured  by  i.-,,!,!  ,„•  u(,vrrmuent  bonds,  it  is  sim- 
ply made  a  i)referred  lien  a-ainst  the  oeneral  assets  of 
the  baid-..      'i'his.   ace-i-dino-   to   the   critics,   makes   the 
money  of  the  depositors  the  securiiy  for  the  note  circula- 
tion ot'  the  countrv. 

A  more  hopeless  confusion  of  mind  tlian  this  i)oint  of 
view  indicates,  can  hardly  be  imagined.     To  beoi,,  ^vitli. 
the  cirndation  of  the  baidxs  cannot  exceed  the^})aid-up 
capital.  '  \c(  |)t  dui-inii  tin'  mo\  in,<4'  of  the  crojts.  or  whei; 
notes  arc    issued  anaiust   IIk    central  .yold   reserves.      In 
the  second   place,  it   is  of  (-onrse  absurd  to  sav   that   tli< 
deposits  are  the  srcurit_\-  for  the  notes.     A  on'at   |»ai't  o( 
Ihc  de|)<;si[s  arise  in   Ihe  lir>t  instance  throunh   previ,)Us 
l"ans  made  by  the  banks,  in  which  the  chief  risk  is  run 
b\-  the  baidxsand  not  by  the  depositors.     Hut  that  is  not 
all.     II  i-^eharocd  that  the  Canadian  ba>d<s  make  unwar- 
r  nU  (I  |)rolits  from  the  no|r  issues:  and  so  -icneral  i^.  this 


(  ANADIAN    r.ANKlN(i    lM{()ni,l,M> 


417 


npinioii   that    it    is  worth  while   to  hriclly   look   into   the 
(|iic'.stioii. 

.)2().  Profits  (til  })((iiL--ii()ic  issues.-  -As  a  rule,  these 
(  lities  do  not  stoj)  to  consider  that  both  deoosit  aceoiiiits 
,111(1  note  issues  cost  the  bank  a  eoiisidei'ahle  sum.  Es- 
[Kcially  is  this  ti'ue  of  the  lattei-.  The  returns  from  the 
(  .Miadian  Iiaid<ers'  Association  show  that  the  notes  rc- 
i<  i\e(l  from  the  ennra\crs  and  tlie  notes  desti'oyed  in 
I;M2  were  as  follows: 


I!'1'2  INcriMii  from  r,ii;:Ta\  t  r.s 

.linu;iry $'2.7  Ui.O  1 'i 

I  I  liru-iry    .'!.775,()()l) 

Miri'h    l'j.-j;i;!.()(i() 

Vpi-il    ;j.l-27,.s;i:! 

M  ly    K.')()().()()() 

.'unr 7.()l(t.()00 

. I  Illy    ,").8()t.0()."i 

AiiuMist    ,->.!)  I- 1- .01 10 

>'  pt'  Mihcr r).()7().l)0() 

<*(lcil)tr    7.f)f)<).oon 

\o\fml)t'r    ().."):;o.iiO'J 

Dn'tinber    (),K{.'i,()()7 

•f71.'-!0.'!.;!:>7 


Drstroy.  (1 

•'t'.>.;577.()U' 
().(U.'5.i.'!,'{ 
4.8r)().87.') 
;!.9:).s.<)8'2 
(i.8r):)..'j:)i 
;M7i.'.29o 
1..">.'!!).().V2 
.■">.87-2.S<)l 
.").ISO.SJ|) 

."'..iO'J.O.U 

:).8i7.8()fi 

K818.^JH) 
.f  ■'Jp.  1-7  K086 


'••if 

ft 


■:il 
III 


The  ItanU-noie  companies  charge  the  Itatiks  ^\M)  per 
I. ()((()  sheets  for  en^ravin^-  notes.  Also,  the  hank  must 
pay  for  the  cost  of  plates  in  the  first  instance.  There 
.ire  four  notes  to  a  sheet,  so  tiie  i-ate  of  -SOO  per  1. ()()() 
•sheets  amounts  to  2'^ '\  cents  ])cr  note.  The  cost  of  en- 
,ura\in<4'  the  notes  for  l'.n2  Mould  amount  to  about  •S'.il-).- 
<l(U).  'I'akiny-  the  a\ei-a,ye  life  of  a  |)late  to  be  H  yeai-s. 
Mif  I'c  would  bi  about  s;{(). ()()()  to  add.  rt  |>r(  ^eniinj^  tlie 
Marly  dei)recialion  of  the  plates.  That  would  make,  in 
lound  numbers.  S24.j.()0()  a  year  foi-  j)rintinti-  the  notes. 
I'lie  average  amount  of  tiotes  in  circulation  in  I'.M'J  was 
^1()(K()0().()()().     Therefore,  the  cost  ol'  print. n^  the  notes 


W 


MS 


MOM'.V    AM)    HANKING 


s 

If'-" 


W 


lb 


r 


aiiioniitcd  to  alioiit  '4  of  one  per  cent  on  tlie  average 
cii'ciilation. 

\  'nder  the  system  prevailing  before  the  re\  ision  of  the 
act  in  11»1.'},  eacli  note  was  count(M-si<rnc(l  in  pen  and  ink. 
This  wonid  invohc  a  consideral)le  expense,  which  \\as 
added  to  the  general  acconnt.  To  this  must  lie  added  the 
items  of  express  and  insurance  on  shipmentsof  tlie  hanks" 
own  notes  to  the  branches,  and  the  cost  of  the  shippiritjtof 
otiier  banks'  n(H.\s  to  the  redemption  centers.  Then  there 
is  the  work  of  the  tellers  at  redemption  centers  in  sort- 
in<i-  up  other  banks"  notes  for  the  elearin"'  house.  These 
expenses  must  all  be  char<ie(l  to  note  circulation.  What 
the  total  of  the  expenses  atti'ibutable  to  the  note  circula- 
tion alone  would  be  cannot  be  accurately  estimated,  but 
they  are  \  ei'v  considerable. 

Then  a^ain.  the  batiks  cannot  consider  wholly  as  reve- 
nue the  funds  derived  from  note  circulation.  ^Vith  each 
SI ()().()()()  ol'  note  issues.  ])ro!)abIy  20  i)er  cent  is  carried 
in  cash  and  bank  balances  yieldinn-  n()thin<r.  iVnother 
•JO  per  cent  would  be  in  Xew  ^"ork  call  loans  netting- 
less  than  -Jl  ■_.  per  cent.  Even  if  the  remainintr  00  per 
cent  earned  0  per  cent,  the  <^ross  revemie  from  .$100,000 
of  circulation  would  not  be  much  more  than  ^-l-.lOO  or 
i  pel'  cent.  The  exj)enses  enumerated  would  amount 
to  1  I  ;j  i)er  cent:  so  the  coiiclusi(Mi  is  reached  that  the  net 
profit  on  tl  ^  note  issues  would  not  be  much  more  than 
■J'  1  per  cent.  Of  course,  the  banks  in  the  East  could 
exist  vww  if  Miey  were  deprived  of  the  ri^ht  of  issuinn^ 
noti's.  but  thi'y  would  have  to  close  up  most  of  their 
l"ranche<  in  the  West,  rnder  pirsent  business  condi- 
tions it  would  be  mere  folly  to  inij)ose  conditions  on  ihv 
banks  such  as  would  increase  the  cxpensi'  of  issnin^ 
notes,  lor  the  lnu'den  would  be  merely  transferred  to  the 
people  in  higher  interest  rates. 


I  A.NADIA.N    IJANKINC;    ril()15I,i;.MS 


[W 


Tlif  <^i-aiii  ti'adc.  and  notably  the  Western  ,<;rain  trade, 
iicnetits  most  uiider  the  present  system  of  note  issne. 
Tlie  hanks  make  al)out  .50  per  eent  of  their  advanees  to 
tlie  ^rain  trade  in  the  foi'm  of  their  own  notes.  Hv 
(  xpandin^'  their  note  eirenhition  SIO.OOO. ()()().  and  other 
(•ie(hts  to  a  hke  sum.  tliey  can  a(l\anee  S-J(). ()()(), ()()() 
t(i  the  ^'rain  trade.  The  demand  foi-  ad\  anecs  from  the 
hanks  to  mo\X'  the  erops  i^  inereasin<^'  year  l)y  year  in 
the  West.  Any  eui'taihuent  of  ereiht  faeihties  wotdd 
Nim])ly  mean  hi^^her  inlei'est  rates,  (irain  havers  would 
he  ohli^ed  to  operate  at  fewer  points,  and  their  power 
to  huy  would  he  lessened.  Ilenee,  in  the  end,  as  has  been 
said,  any  ohstnele  i)lace(l  in  the  way  of  the  haid<s  in  is- 
suin<>'  notes  at  this  critical  period,  oi-  of  raisin<i'  the  cost 
of  note  issue  to  then)  in  any  way.  would  result  merely 
in  throwin<if  a  heavy  burden  upon  the  farmer.  The  ex- 
perience of  the  baid<ers  in  the  Tnited  States,  Mith  their 
;()stly  bond-secured  bank-note  currency,  furnishes  con- 
clusive evidence  on  this  |H)int. 

.")27.  I'J.rccs.sii-c  .siirphifi  or  rest  fniids. —  The  Canadian 
hanks  have  I'ormed  the  hal)it  of  putting-  profits  back  into 
the  })usiness,  in  tile  sha[)e  of  sur[)Ius  or  rest  funds,  to  a 
dei^rce  that  has  come  to  ])e  thou^lit  l)y  many  to  be  exces- 
sive. The  act  itself  s))ecilies  that  no  division  of  profits 
either  l)y  way  of  dixidends  oi-  bonus,  or  both  coml)ined. 
i;r  in  any  other  way.  exceedin*^'  the  rate  of  8  per  cent 
pel-  annum.  sliaH  be  made  by  a  bank  unless,  after  making 
the  same,  the  bank  has  a  surj>lus  or  rest  fund  ecpial  to 
at  least  .*}()  per  cent  of  its  iiaid-uj)  capital,  after  deduct- 
iiiiT  all  liad  and  doubtful  drbts.  On  Mav  .'H.  li)l.'}.  the 
paid-up  capital  of  the  banks  amounted  to  i^l  l.),l)(ii).l..'{;j 
and  the  rest  to  SlOS.CSl  .2:}(). 

The  ])racticr  of  buildino-  up  larne  reserve  funds  mav 
have  been  well  enouuh  iu  its  time,  but  it  is  liardh-  in  the 

e— \"II"^:iO 


i. 


[JO 


MONEY   AND   13  AX  KING 


Hi 


i£t- 


best  interests  of  either  the  hjuiks  or  the  eountry  to-{hi\ . 
In  earher  (htys  tlie  earning  power  of  the  hanks  was  much 
in  excess  of  that  of  orchnary  and  reasonably  secure  in- 
vestments.    Stoekliohhrs.  therefore,  asirh-  from  the  pro- 
vision of  the  act.  were  content  uitli  the  distribution  of 
a  \  cry  moderate  share  of  the  profits.    They  were  content 
to  put  the  rest  back  into  tlieir  pn  pcrty.  for  ihcir  ultimate 
welfare.     Hut  to-day  every  form  of  investment  expects  a 
hioher  return.     The  earninos  of  the  banks,  calculated 
upon  the  real  amount  of  the  shareholders'  investments, 
are  no   lontrer  exceptionally    laroe.      Moi-cover.   in  the 
early  days   there   were   \ery   few    forms    of  investment 
which   compared    with    banking'    in   attractix  eness:    par- 
ticularly to  well-informed   invesloi's  who  feit   that   tiny 
could  .iudoe  of   the  calibre   and    (•har.iet(  r   (d'   the   meii 
in  charge  of  the  banks.     To-day.  ^\'\\]^  the  enormous  in- 
crease and  di\crsi(ieation  of  corjioi-ate  finaneinn-.  there 
are  scores  of  opportunities  e(|ually  attractive  as  bink- 
in^-.    If  an  investor  m  ants  as  hi^t^h  a  rate  of  earninus  with 
about  the  same  deo-ree  of  security,  hundn  ds  of  kinds  of 
preferred  stocks  are  otiered   for  his  approval.      If  he 
wishes  sound  security  with  a  chance  to   jiarticipate   in 
future  o-alns.  he  may  select  any  one  of  maiiv  dilt'erent 
bonds,  each  carry ino-  •,   h(Muis  of  common   stock.     Ca- 
nadian municijjal  bonds  are  risin.u'  to  a  ooint  where  their 
yield  compares  favorably  with  that  of  bank  stocks,  and 
investment  in  them  involves  hardly  any  risk  at  all.     It 
is  hardly  possible  for  banks  to  continue  their  past  policy 
and  expect  to  secure  cap'ital  subject  to  double  liability, 
at  tlie  old  divid'^nd  rate. 

The  banks  are,  as  a  niatti'r  of  fact,  earning  more  than 
they  ever  were.  These  earninos  may  be  further  in- 
creased by  economies  resuitm»-  from  amalgamation,  and 
agreements  regarding  extensions  into  new  territory;  and 


CANADIAN     I{.\NKIN(i    IMtOHI.l.MS 


\oi 


i.i 


ly  irdiK-iny  tlic  'uiionnt  of  ca]:;ital  iti  tlie  form  r-i  sur- 
)lns  cm }) loved  in  unproductive  ways — palatial  office 
Innldino's  and  tlic  like.  '1  Ik  carnin<,''.s  arc  not  excessive 
iiy  any  means;  hut  they  are  large  enou<.  h  to  make  i)ank- 
ing  investment  look  attractive  aloni>side  of  other  tmn- 
<;pecidati\e  entei'prises  in  the  Dominion,  if  only  the 
directoi-s  would  make  a  distrihutinn  of  a  projjcr  pro- 
pi'iiion  o|'  those  earnin()'s.  But  instead  of  this,  so  small 
.1  proportion  is  allowed  {o  reac-h  the  shareholder  in  the 
I'nin  of  dixidends  that  the  stock  exchanores — which 
value  a  stock  very  lar<j:ely  hy  the  yield-  actually  value 
nearly  all  of  these  hank  stocks  at  less  than  tlie  halance 
^lit-et  show  illy-  of  the  shareholders'  ])roperty — that  is.  the 
t.ipital.  sui-plus.  ami  undi\id((i  profits. 

Nor  is  this  low  return  made  .u'ood  to  anv  extent  hv 
riielon-cullin^y.""  IJecent  issues  of  new  stoi  k  in  the  Ca- 
nadian hanks  have  heen  made  at  prices  so  near  to  the 
market  value  of  the  stock  that  the  "rights"  were  incon- 
-iderahle.  The  ohject  of  this  ])oIicy.  of  course,  was  to 
I  outmue  t!ie  huildin<>-  up  of  enormous  reserve  funds  by 
means  of  the  liio-h  premiums.  The  stronger  and  hetter- 
estahjishcvl  hanks  actually  made  their  shareholders  pay 
a  price  for  new  stock  which  jjrovided  the  l;aidv  with 
money  at  less  than  0  jier  cent.  This,  too,  was  on  an 
i;i\  estment  that  made  tiie  purchaser  liable  to  a  loss  (  nom- 
inal, it  is  true,  but  still  a  factor  to  be  considered)  ecpial 
'•  the  face  value  of  the  stock  purchased.  This  double 
iia])ility  feature  cannot  be  ignored. 

Canada  urgently  needs  more  banking  capital.  The 
hanks  themselves  urgently  need  more  capital.  Tliey 
need  it  in  order  to  increase  their  circulation,  which  is 
limited  by  the  paid-up  capital,  if  for  no  other  purpose. 
I  hat  cn-culation  is  free,  untaxed  ai.d  based  upon  the 
general  assets  of  the  bank.     The  banks  now  regularly 


4 


.M().\i;V    AN!)    n.\NKI\(r 


If-- 


excad  tln'  iMitaxcd  cii'ciilat ion  in  rvvvy  iiioiiili  of  tln^ 
yea.-  (  Scptuiiiljcr  to  I-'ehriiary  i  iti  wliicli  tlicv  arc  \)vr- 
iiiittud  to  do  so.  Tliey  are  ])rat'ti('ally  t'orced  to  do  so; 
and  tlity  pay  a  tax  of  .)  per  cent  for  the  pri\  il(  yc. 
There  is  hardly  a  hank  in  Caiuuhi  which  eould  not  k(  i r- 
oiiistaiuhn^'  i'ii'cnlation  {'(jnal  to  the  I'nll  amount  of  it-, 
eaj)itai  foi'  niru'  months  in  tlie  year  and  moi'e. 

liidei"  these  eii'enmstaiiecs.  why  shonhl  a  hank  seek 
to  maintain  a  I'est  fund  <'(|nal  to  its  eapitah  hy  issuin.u' 
new  stoeU  at  ^'JOO.  anii  nort'  \\v  issninu"  twice  the 
amonnt  at  •**'1()()  it  eould  increase  its  circulation  facilities 
twice  as  nincli.  ui\ c  \aluahlc  '  i-i;^hts""  to  its  stockholders 
tliat  w'ouid  make  them  feel  an  int(.'i-est  in  the  expansion 
of  the  haid-;  s  husiness.  and  'ivc  the  ci'editoi's  of  the  hank 
not  only  cMpial  secui'ity  hut  a  n'reat-r  security  hecause 
of  the  donhU'  lialiility  extendiui^'  to  twice  as  lar^e  an 
amount  of  ca])ital.  I'eri  :  ps  such  a  di\ision  of  pi'ofjts 
would  he  extreme:  hut  at  any  rate  new  stock  should 
l)e  put  out  a  y-ood  deal  under  the  s-joo  mai'^^in. 

In  the  formative  days  of  Canadian  haiikin;^'  fear  ol 
the  (loiiMe  lialiility  was  undouhtedly  a  stroii;^'  diterrenl 
a<4ainst  the  |)olicy  of  lar^i-  ca.nital  and  a  -mall  surplus, 
'riierel'ore.  the  liuiiU  ^f  the  sharcholdcrvs  wei-e  put    into 

tlu'    I'est    and    not    the  capital    tol'   the    plU'pose   of   keepiuLl 

the  douhle  liahility  (lov\n.  Uut  the  well-estahlished 
hanks  are  now  on  m»  lii-ni  a  hasis  that  the  douhle  liahil- 
ity is  hardly  a  factoi-  in  i^ovcrninu'  the  clioict  of  inxe-t- 
nient.  It  is  hardly  to  he  supposed,  foi'  example,  thai 
I  lu  luarket  p(is!ti(»n  of  the  Ho\al  Ha(d\  would  hr  iui- 
])an'.  d  if  the  entii'e  «•_' 1. 000. ()()()  of  comhined  capita!  and 
rest  w(i'e  entered  as  capital,  uistead  of  heiny'.  as  now. 
SI  l..")()0.(MM»  (ajiital  and  srj. .-)()(>. OOO  yrs\ .  'I'lic  douhle 
lial>dil\  o|  the  s|iai<  liol{|(  1  >  wouki  iie  nicreascd  h\-  spj.- 
oOO.OOO    1)\     the   chau'ic;    '»  it    the   clianc<-    of    tla    extra 


4^^^ 


CANADIAN    HANKIN(,    ni()HLi:.MS 


K).'? 


Ii,il)ilily  vwv  \k'\\]}X  ciirorct'd  i<  so  I'tinotc^  as  lo  Ik    almost 

III  nli!4il)k'.  The  stocklioMn-  would  rcccixc  the  saiiu'  I'c- 
tiii'ii.  althoiio'li  the  rate  per  cent  would  he  lait  in  two. 
( >ii  the  othei-  hand,  the  hank  would  he  ahle  to  is^ue  notes 
lip  to  $24..()()(),()()()  it  it  so  w  ished  :  m  li.reas.  at  the  present 
iiiiie,  it  must  i)av  a  tax  for  excess  issue  dui-inu  the  mo\- 
iiiu  ol'  tlie  crops.  oi-  (k'posit  {k)llar  I'oi-  dollar  in  uold  or 
Dominion  notes  in  the  eenti'al  i'eser\es.  'l'lii>  example, 
mT  eoui-se.  is  ustd  merely  hy  way  of  illusti-at ion.  While 
llie  hanks  will  hai'dly  turn  Hieir  sui'plus  into  ea|)ital  hv 
(leelarin;;-  a  stock  dividend,  it  is  time  that  the  hnildint^- 
!ip  of  excessive  i-esei'x  tvs  reeei\ed  a  check. 

.VJS.  Profits  (if  tin  ('(iiKulidii  hdiihs. —  It  is  a  conunon 
(  liai'^'c  auainst  the  hanks  that  they  ai-e  making  exei'ssi\c 
prolits.  as  their  juinual  statements  appear  to  sjiow.  and 
that  til'  ])uhlic  is  paxinu'  hio  niueli  to  lia\r  its  liankiiiu' 
husiness  doni'.  To  a  eei'tain  extent  tin-  hanks  ai'e  them- 
M  |\(s  to  hiame   for  the  sjiread   of  this  opinion.      They 

iK  |)i'one  to  hoast  of  their  prosjxi'ity.  especially  when 
iluy  sick  to  attract  new  <"i])ital.     .\n  exam|)le  will  make 

Irar  the  situation.  The  ru  t  prolitsof  the  Canadian  liank 
"I  Commerc'.'  for  I'.M-J  wci'e  S'J.KOO. (»()()  on  a  capital  of 
>^ ;.").()()(». ()()(»,  which  is  somewhat  mori'  than  IS  per  cent, 
itiit  d'  the  sm'plus  or  I'est  is  included  the  pi'ofit  would 
ii.i\(    to  he  computed  on  S-_>7, .-)()( ).()()(»  and  would  he  tlien 

'|ual  to  o!ily  a  little  more  than  10  pir  ciiit.  It  seems 
elea!'  that  the  only  fan-  way  to  estimate  the  prolils  is  to 

luliide  tlit  total  m\  estnlent^  of  the  sliari  holders.  \\  hether 

iiat   in\estmeiit  apjiearsas  capital  or  rest    fund. 
In  an  attempt  \<>  di<»\\  to  the  Committee  (iii   Hankiui^- 

lid  ConiMierce  that  the  hanks  are  not  making  <  \cessi\e 
|'io( its.  as  compared  with  other  enter pi'i si  s.  .Sir  I'jlmund 
"\'\  aii^(  r  iiad  prepared  one  liunch-ed  liaianci  sliiels  of  as 
iiiaiiy     typical     cstahlishmciits     excluding     real    (^tat' 


'♦:• 


t;! 


~/  ■.-.if  • 

"I 


[31 


M()M:\     AM)    BANKING 


iSi' 


\  i  ■  1 


?    t! 


i 


rancliiun-  and  )':irmiii^  wliicli  wt^vv  funiislic'd  h\  'us- 
toiiiei-s  of  the  C'aiiaditui  Hank  of  C"onniit!-cc.  'I'iu-se 
.statements  eovered  the  eariiiii<^'  of  estahhshments  in  4'.> 
different  Hne#  of  industry  ■ranoinu'  from  eraeker  fac- 
tories to  eoal  mines'":  and  repirsented  an  investment  nl' 
^TO.OOO.UOO.  Thev  \\ei-e.  moreover,  eoneerns  of  axerasi-e 
normal  prospt'ril;  .  chosen  merciv  with  the  v\n\  in  view 
of  disc()verin<i'  the  average  proiits  of  an  average  husiness. 
In  each  lase  it  was  foimd  the  avd'aye  ijrolit  was  hiu'her 
than  that  of  the  haidss.  althou-^h  in  some  eases  it  was 
ajiproximately  the  same. 

Sir  K(hnnnd  Walker  further  presented  a  statement  to 
the  Committee  analy/in^  the  ])i-ofits  made  hy  the  k-ad- 
ing  hanks.  He  found  that  the  eai'ninns  ,,t'  the  hanks  on 
their  ca|)ital  and  surphis  eomhincd  was  somewliat  in 
excess  of  '.»  per  cent.  The  profit.';  (not  (hvidcnd-,  i  in 
rehition  to  the  mai'ket  price  of  the  stock  ratiL'c  from 
•  i'  ■_.  |)er  cent  to  I'J  |)er  •cnt.  The  percentage  of  the  (h\  i- 
dends  to  the  maiket  price  of  the  stock  is.  in  geiierak 
Itetween  .')  and  .'>'  ■•  pei-  cent. 

'I'hc  (jucstion  may  also  Ik  re-^aidi-d  from  another  point 
of  view.  'I'he  pr.itits  made  hy  Canadian  l)aid<>  on  the 
cntiix'  assets  which  they  control  aitioiuit  to  l.i'O  per 
criil.  and  ran.ue.  in  the  case  of  IJie  itidividmd  h.-inks. 
fiom  .!t:i  to  !..-)<>.  If  it  iv  c(.n>i(lercd  that  a  hank  could 
make  on  its  capital  and  siirphis  i\  per  cent  in  ;in\  otlu  r 
inve.stmeiit  Imsincvs.  then  th--  pidfits  ni.ade  on  their  otli(  r 
assets,  v^hicli  th.y  control  in  virtue  o|'  Ijie  peculiar  fea- 
tures of  llie  haidxin^i  liiisiiie-,s.  wiiiild  .averaue  sonHuhen 
I'clw.rn  .-J,-)  .iiid  :Ut  per  cru\  'I'ha!  iv  to  s;n  .  tin  \  make 
•'  I't'l""  niore  tha,i  one-(|uai-ter  of  (uie  per  c(  nt  profit  on 
tJKir  total  .ismIs.  if  it  is  considered  tli.it  (i  pei-  cent  m;iv 
'"  aiiowed  (III  ih(  capitai  and  sin-pliis  e(pntril)uted  hy 
the  shanlioldt  IS  llu  uiselv  cs.     This  is  summari/.:d  in  tin 


nm 


CANADIAN    i};\NKING   I'UOBLK.MS 


15' 


t'.illouing  table,  iji  which  "capital"'  includes  capital  rest 
aiui  undivided  i)rotits: 


l^rotit  on 

B:uik  Total 
As.^ets 

Conimcrct'   ...  1.1! 

Doii.inion    ...  1.1  t 

!1  iiiiilton    ...  1.01 

I  li  I'llilaga   .     .  1  ,,;7 

liiipcri/il    .  ,     .  \.:i6 

Metropolitan.  1.23 

Montreal     .  .  .  1.0(3 

M.  rcliaiits  ...  I.j9 

\!nlsons    ....  1.-29 

N.itionale    .  .  .  1.35 

Nova  Scotia  .  .  \  .36 

Ott.iwa    I.'JG 

t^R-bcc    1.33 

Hoy, si 93 

.-I  inilard   ....  1 . 1  ,' 

I'lronto 1.  U 

I   nion    I  .(I-,' 


Profit,  After 

■vllowingO'lj 
on  Capital 

E;irniniis 
on  Capital 

Plarning.s  on 
.Market  Price 
(.r  Stock 

1912. 
Dividend.- 

01!  -Market 
Price  of 
Stock 

.1") 

10.  l.j 

8.()1 

5.07 

.-25 

7. SI 

1 . 1  1 

5.03 

.18 

7.11 

8.10 

5.39 

.10 

7.98 

9.61 

1.19 

..■JU 

7.83 

7.37 

5.29 

.18 

7.07 

8.18 

5.03 

O; 

7.11 

6.35 

1.81 

.61 

lO.l.'i 

lO.O'i 

5.05 

.;io 

7.7U 

8.-27 

5.31 

.39 

8.53 

1  1.81 

5.65 

.22 

7.18 

7.10 

5.05 

.26 

7.74 

8.01 

5.62 

.30 

7.8'2 

8.93 

5.3 

.10 

(i.lO 

6.11 

5.33 

.-'!• 

0.7-2 

8.06 

5.51 

■27 

7.56 

8.00 

5.71 

.'29 

8.11 

9.26 

5.3 

In  view  of  all  tlii<  it  is  (■\i(lent  that  Canadian  hanks 
•lie  far  from  niMkinti  cxcessixc  profits.  What  ett'eet  the 
present  rate  of  dixidends  and  piofits  \\ill  haw  in  at- 
lraetin<2'  "cw  capital  into  the  hankinii'  field  can  onlv 
he  surmised.  New  hanUs  will  nndoiihtedly  he  started; 
hnt  they  \\ill  he  sttnied  hy  people  who  will  he  willinu; 
t  1  wait  for  a  rrtnrn  on  the  capital  in\ested.  Xew 
I tatd\s  ^cannot  immediately  earn  and  pay  a  dividetid. 
That  is  praetieallx  impossihlc  in  Ihe.-i'  days.  Many 
hanks  lia\e  heen  starhd  in  the  I  'niled  States  within  the 
last  twenty  years:  hul  lh<y  hast  heen  started  on  tluir 
career  hy  men  who  km  \\  that  their  moiux  could  n<it 
earn  a  dividind.  with  safet\'.  for  three  or  four  vears. 
The  |irolits  ha\e  hct  n  put  into  IIk  hjink'-.  .Manv  of  the 
concerns,   when  earefnIK    manaued.   Iia\e   heen   notahlv 


I ' 


Ail 


»5(i  M()m:v  and  R.\\Krv(^, 

successful:  and  for  the  I'litmr.  luw  Canadian  hanks  must 
I'ollow  the  sanii'  c(»nsci'\  at  i\  f  hues. 

.32!).  liaiih'  nicr^irs  aud  (ii/iiil^^di/iiilKtN.s.-  -The  opin- 
ion lias  heen  in(histriously  spread  hy  t!ie  i-adieal  element 
in  ('ana(hi  that  the  hanks  form  a  liu«>c  ■"moiu  y  trust" 
and  are  wockino  tooethei-  foi-  the  exploitation  of  the 
country.  It  is  niaiiuaincd  that  the  process  has  heen  fur- 
thered hy  recent  hank  amai^aniat ions.  This  |)rohlem 
occupied  a  <xi)in]  dial  of  attention  during  the  last  revision 
of  the  act.  and  is  ther<t'()i-c  worth  considci'ino". 

It  is  perftctly  true,  of  course,  that  the  Canadian 
hardxino'  system  is  made  up  of  institutions  of  relatively 
larov  capital.  That  is  seen  hy  a  ,uiance  at  the  following 
tahle  which  shows  the  am(!iint  of  capital  and  surplus  of 
the  kadiu'i'  hanks: 

'^•■'"'^  (',i|ii(il  H<st  or  .Surplus 

^'""''■ral     .-fKi.diKl.ODO  .^1  ().()()().( )()() 

(  omiiK  rcr    l,"),0(l().(l()l)  I'-'.riOO.OOO 

Htiya]    1  l.:)()0.n()o  !■.;., ">()(). ()()() 

'"'I'Tial (I.soy.i.u  T.ooo.ooo 

No\,i  .*^(()li;i .").<),")7.;5'20  l().8.'{().2i8 

Doiniilidii J. .'!.')(). 'J'iT  ()..'!,")(). •J'iT 

ruronto    ;■■>.(>{)().()()()  (i.OOO.OOO 

That  the  tcndcncx  in  i-cccnl  years  has  heco  to  riduce 
the  numher  of  hank<  and  to  inci'ease  tin  n-  si/e  cannot  he 
disputed.  In  se\(i-al  easts  the  si/e  of  the  liank  Iris  hecn 
increased  hy  amaluamat  im;  with  it  weaker  institutions. 
Most  hatdscrs  at;ree  that  it  is  a  n'ood  tliiuLf  to  remoxc  a 
weak  hank  hy  mei';4inL;'  it  with  a  ^IronLiCi'  one.  'I'liev 
lia\('  not  hesitated  to  pid  their  tliccM'ics  into  practice. 
'I'lu'  n.Mid<  of  Montreal  hasahsorhed  tlu'ce:  the  Canadian 
Hank  of  Commerce,  t'our:  the  liank  of  \o\a  Scotia. two; 
and  the  Ho\al  Hank.  two.  'I'hesc  consolidations  ha\c 
heen  fornud.  Iiowi'vcr.  witii  the  oh  jet  I  of  seciu'inL>'  a 
sfron<4'  chain  of  hranchi  s  throughout  die  whole  country. 


CANADIAN    HANKINC    Pl{()l',l,l  ..MS 


4r>T 


I 'nr  example,  in  llie  rccriit  iiuM-<4er  of  \\\c  'ri-adti'-  liaiik 
and  the  Royal  Hank  the  t'ornui'  liad  liranclus  i-ontimd 
tor  the  most  part  to  Ontario  and  the  middle  West,  while 
the  Royal  was  stioiif^iy  represented  in  the  maritime 
I)ro\inees  and  on  the  Paeitie  Coast.  The  union  of  these 
lianks  formed  an  institution  with  hi'ani'hes  widely  seat- 
tci'ed  througliont  the  len<4th  and  hreadth  of  Canada. 
The  hranehes  were  (]u{)lieated  at  fifteen  points  onl>  : 
liiit  as  many  of  these  points  ai'c  eommn-eial  eenters 
already  well  supi)lie(l  with  hank-,  it  is  hardly  possihle 
that  eompetition  will  he  lessened  hy  the  union  ol'  these 
two  institutions. 

Now,  in  s|jite  of  the  eritieism  aroused  l)y  these  merg- 
ers, it  is  noteworthy  that  the  Canadian  hanks  have  ex- 
panded in  all  direetions  in  recent  yeai's.  Thi>  a])|)!i(.'s 
not  only  to  their  increase  in  capital  hut  also  in  the  facil- 
ities for  haid\in;4'  <'tfered  to  the  people.  This  has  hecn 
due  to  the  i'ai)i(l  di  \clopment  of  the  country,  and  to  the 
lai-<4e  capital  in\i'stn)ents  that  h.ive  hecn  made.  The 
iiumher  of  new  hi'anehes  that  ha\e  hecn  estahlished  in 
all  dii-ections  is  certaitdy  remarkahle;  and  the  ma  |oi-ity 
of  these  hranehes  l!a\e  (piickly  justitied  their  estahlish- 
iiietit. 

Hut.  .so  far  from  hein^-  tnie  thai  the  h,  iiks  ha\e 
foiMned  any  sort  of  ti'ust.  many  parts  of  the  Dominion 
-eciii  to  ha\e  evi'ii  excessive  hankin^'  accommodation, 
riie  hanks  themsehcs  have  f(  It  the  prcssuri'  of  this  com- 
[jetition.  and  aiv  not  rushin;^  into  new  tt  ri'Itoi'\-  as  thev 
did  a  year  oi- two  at>().  1 1  is  desirahle  th;it  hanks,  heforc 
!'!  ancliiii<4  'lul.  .should  iiioicMiyliK-  salisfv  llieiii>el\e<  of 
the  need  of  additional  hanking'  f;iciliti(s  in  the  new  dis- 
tricts; otherwise,  as  has  hecn  said,  undue  com|)et  it  ion  is 
the  result,  'I'hi^  i-aiscs  discount  rates  in  the  end  and 
causes  the  hanks  to  undertake  undesirahlc  hiisiness.    The 


1  ■ 


MONEY   AND    HANKING 


V-Pi 


danger  at  tlie  present  time  is  in  the  undue  niultlplicatiun 
ot'braneh  hanks,  rather  than  the  reverse.  If  the  hanks, 
especially  in  the  West,  wijuld  uork  more  in  harmuny 
with  one  another,  it  would  result  in  more  reasonable 
banking  rates  and  I'aeilities  for  their  customers. 

In  order  that  the  pnhlie  interests  may  be  safeguarded, 
however,  the  Act  of  1!>1.'J  provides  that  ikj  agreement 
t)y  a  bank  to  sell  the  wIk^Ic  or  any  porti(jn  of  its  assets 
to  another  bank  can  be  made  luitil  the  minister  of  tinance 
tirst  gives  liis  consent.  Mr.  McLeod.  late  general  man- 
ager of  the  liank  of  Xova  Scotia,  and  others  as  well, 
maintained  that  the  assent  of  parliament  to  a  |)roposed 
merger  should  also  be  secured:  but  the  precautions  taken 
\vould  seem  to  be  suthcient.  If  the  matter  became  pub- 
lie  and  were  discussed  in  parliament  it  would  manifestlv 
prejudice  the  jjosition  of  the  bank  that  was  selling  out 
its  interests.  An  attempt  would  be  made  at  (Mice  l)v  the 
ftther  banks  to  get  part  of  its  business:  and,  as  a  result, 
it  is  extremely  douotfnl  whether  the  agreement  could 
be  put  through.  And  there  may  be  gXHxi  reasons  why 
it  should  be  put  throngh.  If  a  bank  gets  into  a  bad 
eoiidition.  it  is  sometimes  necessary  that  it  should  be 
absorbed  by  some  other  baid<.  thus  sa\  ing  the  ])ublic 
from  the  shock  to  business  that  would  arise  from  a  bank 
failui-e.  That  j)oint  should  not  be  (»\erlooked,  for  it  is 
important  in  considering  the  (|uestion  (if  consolidation. 

o'-U).  lirtuicJns  in  foreign  cotintriis.-  The  Canadian 
banks  ha\f  taken  achantage  to  a  c-onsiderable  extent  cU' 
that  pro\ision  of  the  law  which  p<  rmits  them  to  open 
branches  \\\  foreign  countries.  A\  tin  ( ikl  (if  WWl  they 
had  I.'{  branches  in  Xewfoundland  and  Wl  branches  else- 
whcie  principally  in  the  I'nited  .States.  Mexico,  Cuba 
and  tli(  Mntisli  West  Indus.  On  the  whole,  this  has 
resulteil  in  alfording  fail'  facilities  for  the  extension  of 


CANADIAN    HA.NKINC;    l'R()l?T.F..MS 


450 


(  iiiada's  trade.  Some  o|)])()siti(»n  has  develoj^ed  against 
'his  i)()licy,  and  pi'oposals  lia\e  arisen  to  tax  capital 
loaned  by  Canadian  banks  in  t'oreij^'n  countries.  For- 
tiiiiatei\-.  at  the  hite  revision  of  the  act,  this  sno-o'estion 
was  not  carried  into  eH'eet.  Xolhin^  conhi  be  jjained  by 
la\in^'  the  funds  ol"  banks  employed  abroad.  i\)v  the 
i'lisines'^  that  the  banks  carry  on  is  to  the  direct  advan- 
taue  of  Canada,  as  ueii  as  to  the  banks.  Vov  example. 
the  Koyal  Haidv  went  into  Cuba  in  1H'.>1)  and  now  has 
I'.t  branclKs  there.  In  IHOI  Canada's  imports  from 
(  uba  amounted  to  .$.'J4.*J..'}74  and  exports  to  ^.578.013. 
Ill  r.>l'2  the  correspondin<i'  fioui-fs  were  ii^l.TTO.HT^  for 
imports  and  ^'2AV.){},77^  for  exports.  While,  of  course, 
tilt  banks  cannot  be  credited  \y'\[\]  this  very  large  gain, 
\r!  thev  ha\e  undoubtcdiv  tireatlv  aided  exchanu'c  of 
[Moducts  between  the  two  countries. 

The  lianks  in  Cuba  and  the  W'esI  Indies  are  not  de- 
pindent  upon  Canadian  mon>y,  On  the  c-ontrarv,  de- 
|ii).sits  thei'e  are  in  excess  oi  the  loans  made.  1 1  would, 
tlierefore.  for  this  reason  among  man\  others,  be  un- 
\nse  to  discouia<_!,e  Cana('ian  banks  froui  opening  up 
liranclus  in  these  islands.  The  \ation;il  Hanks  of  the 
(  nited  States  are  now  permitted  to  establish  bi-anehes  in 
loieign  countiies.  I  lad  tluy  always  bei  n  al>li  ti.  do  >,(», 
llie  foi-eign  trade  of  that  country  would  bi'  greater  than 
it  is  to-day.  It  is  estimated  that  -S'JOO.OOO. ()(>()  of  Anu  r- 
lan  ca])ital  i^  inxfsted  in  Cuba  alone:  but  it  is  the 
Canadian  lianks  that  baxc  lakt  n  greatest  ad\antage 
"f  the  opportimities  of1'ere<l  in  the  baid<ing  field.  The 
hanks  pay  interest  at  the  rate-  ol  '4  per  cent  on  de|)(jsits 
:ii  Cuba,  and  charge  an  a\erage  of  7'-  per  cent  on 
f'»ans.  .Vbout  'J.')  percent  of  sui'plus  deposits  is  retained 
III  these  islands:  the  rest  is  loaned  on  call  in  New  N'oi'k. 
Ill  no  wav  does  this  t'oreign  business  weaken   the   po^i- 


'I 


%M 


m 


m 


im 


.MOXr.V    .\\i)    UANKINd 


I  HP 


!!i-i^: 


(ion  of  tlic  hanks  in  C  aimda.  il  need  lie.  tlic  loans  in 
\t\v  ^  ork  could  he  nia(k' a\  aihil)lc  in  a  iKricd  of  [lanic 
in  this  countrx'. 

y.il.  ('((II  loans  in   A'.tl'    )'(irh\     On   Mav  .'51.   lUi:}. 
tlic  call  and  shorr   loans  of  Canadian   hanks,  ciscuhciv 
than  in  Canada,  ainoinitid  to  ■•^1m;.1.)1. •_>()<).     'IMicsc  loan> 
arc  \'i)v  the  most  part  made  in  tlu'  City  of  Xcw   Yovk. 
'J'licy   ha\c  often  hccn   severely   critici/cd:    hut.   on   tin 
wliolc.  this  ])olicy  can  he    jiistilied.      It   is  necessarv   to 
keep  a  coiisiderahle  part  of  a  hank's  k)ans  in  such  licjuid 
ioi'ni  that  they  may  he  rcali/ed  n|)i)n  in  anv  emi  r^cncv 
that  may  aiise.     Dni'inu'  the  tronhle  of  IDOT  tlie  foreion 
loans  saxed  the  situation  in  Caiiada.     \\\  [hv  (.iid  of  I'.lOT 
the  Canadian   hanks  had  exhausted   all   the   moiiev   l)e- 
lonoitio-  to  them  ahroad.  and  had   imported  out  of  tli( 
(lc|)osits  in  othei-  coimtries  s-j.sn .(»()().      'i'lie  hanks  dn 
not  lend  at  call  in  \e\\   ^'ol•k  to  secure  exceptional  pi-oj- 
its:   hut    chielly    to    pi'cnrx  e   a    cei-tain    poi'tioii    of   tlitii' 
loans  ill  a  hio|,|y  Ii(|iiid  fomi.     A<  a  laile.  the  l)anks  lend 
money  in  Xeu    York  at  a  much  lower  avcraiic  rate  than 
in  Canada,    'i'he  jiioh  lates  of  interest,  so  often  r<t'errcd 
to.  occair  at  rare  oi'casioiis  only,  at   a   time  of  excessiw 
monetary  striii<^eiicy  or  of  panic,  and  do  not  matcriallv 
att'ect  the  avera«i-e  rate  of   int<i(  st   ea.rned.      Morcoxer. 
at   times   of  hioli    interest    rates    tin    hanks    air    almost 
always  withdraw  in,n'  money  from  New    ^'o|•k.  instead  of 
scn(hii<4'  it  thei'c. 

It  is  the  pow(  )•  to  withdraw  monex  at  siicji  tinus 
which  enahles  the  Canadian  hanks  to  support  their  ( iis- 
tomers.  !t  is.  also,  lai-ucly  Ixc.nisr  of  llij-,  power  that 
no  pa!iic  has  taken  place  in  Canada  in^  ivcent  tiim  -,. 
If  New  'V'ork  itself  caniiol  furnish  u'old.  as  in  I'.Mi;. 
the  same  results  are  secured  in  sellino  stcrlinu'  hills  of 
exchaiioe  furnished  i)y   New    ^ Ork.     '1   c  no],)   j^  then 


(  ANADI.W     HANKIMr    ri{(  )HLi:.MS 


4(Jl 


MCiirt'd  ill  London.  The  (ilijcct  of  these  eali  loans  in 
\(  \\  ^'o!■k,  tliercforc,  is  not  so  inneh  to  enlarge  the  {)rol'- 
iis  ol'  (anachaii  h;;nk-.  'S  to  enal)le  them  to  support 
llnir  enstoniers  in  time  ol'  stress,  hy  Iia\  in<4'  a  eonsid- 
I  rahle  pai't  of  their  assets  in  a  h(|ui(l  t'oi'in.  The  eall 
io.nis  thus  t'orni  an  im|ioiiant  i)art  of  the  Canachan 
ii.inks  reser\'es.  In  the  hist  analysis  it  is  mei'i'lv  makinii" 
Use  of  neeessary  rese!'\  es  that  would  otherwise  he  lying 
u-cless  in  Canada. 

.y.i-2.  Call  loans  in  Canada.— ih)  May  .'H.  191.'}.  the 
(all  and  short  loans  on  stocks  and  honds  in  Canada 
amounted  to  !^(;t». •»«•_'. .UO.  A  o'ood  deal  of  niisunder- 
slandin^'  has  arisen  over  this  item,  heeause  ol'  the  dit!i- 
inlly  in  aeenrately  detininn  what  is  meant  hy  the  term 
"short.  '  The  oilicials  of  some  hanks  consider  that  only 
(hose  loans  payahle  within  ten  days  can  j)roperly  he 
iiiehided  under  this  heading:  \\liile  in  other  cases  loans 
of  .'}()  days  Ol-  e\en  iwo  months  are  included.  It  all 
dt  peiids  on  the  di  gree  of  conservatism  of  the  dilVerent 
liankers.  Some  ixw  of  the  opinion  that  only  loans  to 
stoekhrokers  should,  strictly  speaking,  he  termed  "call" 
loans. 

In  the  more  eoiiser\ati\e  lianks.  it  is  true,  it  is  the 
custom  to  di\i(k'  the  call  or  demand  loans  into  two 
chisses.  The  tii'st  class  is  styled  "strictly  call  loans"  and 
it  inchides  only  the  loans  made  strictly  on  call  to  stock- 
lirokers  on  honds  and  stocks.  Ail  other  demand  loans 
should  go  into  the  second  class.  v\v\i  when  tlie\-  are 
secured  hy  honds.  stocks  and  dehentures.  When  ih;'t 
i'raclite  is  foll(»\\ed  ii  makes  foi- a  clear,  true  statement 
ofall'airs.  In  studying  the  position  of  a  jjarticular  iiank 
the-  d(  positors  or  the  general  piihlic  are  accustomed  to 
eonsidering  the  call  and  sh(trt  loans  as  an  im])ortaiit  part 
if  the  restrxe  of  (|uick  assets.     When  the  hank  |»reseiits 


rti 


Mi 


Tm 


i» 


^^)\ 


M0M;\     AM)    J{.\NKl.\(i 


its  statenit'iit.  hy  inttiviKr  it  (Ifclares  that  tlie  amonn^ 
shruMi  in   the  call-loiiii   (•oliuiiii  can  he  taken   as  quid 
assets:  and   wlien   this  lunount    is  made   u|)  of  strictly 
call  loans  to  stockhrokers  that  is  undonhtedly  the  case. 
If  it  wished  to  do  so  a  haidv  ininrlit  put  in  consider- 
ahle  loans,   uhich  ai'e  really  s|o\v.   in  the   call-loan   col- 
umn.      In    the    l.io-    city    hranches    there    are   always    a 
consideralile    numher    of    loans    oraiited    to    jjrominctit 
(hrectors   of   indnsti'ial   and   f)ther  corporations   on   the 
stocks  of  their  own  companies.     These  horrowers  have 
no  intention  ot  sellin.ir  the  stocks:  in  fact,  they  could  not 
retani  control  o!'  the  eoi-poration  it  their  collateral  were 
sold.     So.  as  a    matter  of   fact,   in   actual    practice,   the 
loans  sometiniis  run  alon.o-  from  y(>ar  to  year,  althoutrl) 
tlie\-    may    lu     payahle   on    demand.      Now.    such    loans 
should    not    he   considered   (piick   assets:     they   are   not 
meant   to  he  .such  hy  the  horrower.  and  should  not  l)e 
considered  so  by  the  hanks. 

Then,  aoain.  the  hanks  have  nearly  always  a  num- 
her of  loans  on  stocks  and  bonds  cai-ried  by  "princi- 
pals." That  is  to  say.  the  <lea]er,  instiad  of  carrying- 
his  stocks  by  means  of  a  broki-r's  loan,  carries  them 
ill  his  bank  liability  account,  'i'lic  l)anks  prefer  to  deal 
with  a  broker  instead  of  with  a  princij)al.  as  it  is  always 
nmre  diflienlt  to  .sell  out  the  collateral  pledoed  Ijy'a 
principal  than  thai  plcdoe<I  by  a  broker;  forthe  bor- 
rower may  be  an  intluential  customer,  and  if  the  bank 
sold  out  his  collateral  against  his  wishes  it  would  run 
the  risk  of  losinn'  a  valuable  commercial  or  industrial 
account.  These  loans,  no  doubt,  are  payaltle  on  de- 
mand; but  they  are  not  to  be  compared  with  the  strictly 
call  loans  in  point  of  view  of  fluidity.  Yet.  in  mnst 
cases,  all  these  so-called  demand  loans  appear  under  the 
heading  of  "call  and  sb.oit  loans  on  stocks  and  bonds  in 


CANADIAN    I{ANKI.\(i    PROnLEMS 


U).'} 


('anacla.""     Clearly,  the  practice  should   he  chanoer]  so 
that  only  genuine  call  loans  woulfj  he  counted  as  such. 

o.'J.'i.  l^ndcrxcniins  and  promotion  of  corporations.  -- 
It  ".as  charged  hei'ore  the  C^^immittee  on  Bankintr  and 
(  i^tiinierce.  during'  its  sessions  in  191."},  that  the  hanks 
iiave  heen  closely  allied  \\ith  many  n(\v  enterprises:  and 
tli;!l  liu<ie  new  industrial  conihinations  ha\e  heen  |)!'ac- 
tically  financed  hy  their  funds.  It  was  said,  too,  that 
the  (Teneral  nianaoc  rs  and  directoi-s  of  some  ])anks  have 
profited  1)}  these  promotions.  This  was  notliinf;  more 
than  a  vaoue.  n;eneral  charge.  concernin<T  the  proof  of 
\^hich  no  e\i(lence  A\as  snhniitted.  Xevertlieless.  the  act 
\*as  amended  in  such  a  vay  as  to  make  it  a  penal  offence 
till-  anv  l)ank  official  t<t  accept  honiises  or  <nfts  for  iii\in<r 
iccommodation  to  patron^  of  the  institution. 

The  hanks,  however,  have  ne\er  denied  that  tluv  have 
furnished  capital  to  grouj)?  of  capitalists  -^^ilo  were  start- 
ing- new  industries,  and  v'-  needed  temporary  accom- 
modation durino-  the  under  itin<^'  of  the  securities,  he- 
lore  these  could  he  (lis])ose(l  of  to  the  investing  ])uhlic. 
Such  large  enterprises  could  not  he  started  in  Canada 
unless  hankijig  facilities  were  ])rovidei'  during  that 
[•'■riod  in  which  capitalists  have  underv^  ritten  large 
hlocks  of  securities  of  the  new  corporation  and  have  not 
as  yet  disposed  of  them — that  is,  pending  tile  period 
in  which  tiie  stocks  and  ])onds  can  he  sold  on  the  mar- 
kets of  the  world.  Of  course,  everything  in  such  a  case 
depends  upon  the  character  of  the  underwriters;  whether 
they  are  men  who  are  financially  responsihle,  whether  the 
hanks  hclieve  these  men  can  market  their  securities,  and 
\\hethcr  they  understand  the  nature  of  the  underwrit- 
ing contract.  During  the  interAal  hefore  the  securities 
are  marketed  the  hanks  consider  not  only  the  nature  of 
ihe  collateral  j)ledge(l.  bnt  the  financial  Standing  and 


m 


H 

:'-      Si 


Mil 


.M()M:^     AM)    |{.\\KI.\(i 


iiiU'^iity  of  tlu"  capitalists  coiiccnicd.  Otlicrwisc,  as- 
sistance luiju'lit  l)c  L>i\cri  to  men  of  sti'aw  :  and,  as  a  re- 
sult, the  l)aiiks  ini<4lit  find  llieniselves  owning  the  enter- 
])rise. 

1  )urinn' I'ccent  years  Canadian  institutions  ha.\e  aete(| 
as  hankers  for  laru'c  in(hrsti'ial  undertakings  in  Mexieo 
and  in  South  American  countries.  They  have  heen 
named  as  such  in  the  ])ros])ectuses  of  tliese  corporations; 
hut.  strictly  s])eaking.  this  has  meant  nothing  more  tlian 
that  they  have  lield  the  I'unds  ol' these  eom])anics.  Of 
course,  the  hanks  have  also  advanced  capital  on  undei- 
writings  oj'  fliese  cor])orations.  l)ut  not  in  the  sense  that 
they  ha\('  pro\  idt'd  the  initial  eapitak  l-'or  example,  the 
Canadian  Hank  ol'  Commerce  niade  loans  on  two  very 
important  underw  ritiiigs  made  in  P'.ngland  of  the  Hio 
and  Sao  Paulo  enterprises.  'IMie  loans  \\ei-e  niade  on 
Canadian  nndci'u  i-itings  in  connection  \vith  these  com- 
])am'es:  under\\ritings  of  a  class  that  were  actually 
])lace(l  on  the  market.  The  lai'ge  Canadian  lianks  arc 
always  willing  to  lend  money  on  good  underwritings 
when  funds  ai'c  plentiful:  .just  as  they  make  loans,  on 
securities  alone,  to  financial  houses  in  London  and  else- 
where wlio  aie  ahle  to  covenant  that  when  the  payments 
due  on  the  undci-w  I'itings  are  made  they  will  re))av  the 
l)anks.  That  is  considered  ordinary  banking  husiness 
which  the  larger  hanks  like  to  get.  lU'garding  the  South 
American  enter])rises  as  a  whole.  Sir  Edmund  Walker 
has  stated  that  Canada  its<'lf  has  little  of  its  own  capital 
in  them.  'I'he  money  to  huild  the  entei-])rises  at  Rio 
and  Sail  l\uil(>  was  found  ii'  Kngland.  Helgiuni,  Switz- 
erland and  thi'oughout  the  contineni  of  Europe.  The 
Canadian  haid<s  have  lent  moiiev  on  the  securities  wliicli 
wei'c  sold  in  Europe;  hut  they  have  not  directly  sup- 
})orted  these  enterprises.     Of  course,  the  hanks  have  also 


CANADIAN    HANKIN(,    rilOlU.K.MS 


H).: 


directly  particiijatal  in  tlu- iiiidcrwriti!!^  of  pnhlic  securi- 
ties "nu!iiici|)al.  provincial  and  Dominion.  Most  of  the 
l,ir;^'c  Canadian  banks  associate  tlieniselves  with  the  un- 
(lertakino-  wliencver  the  Dominion  o()vernment  1)()ito\vs 
ill  the  London  money  market. 

The  <r()vernment  returns  of  May  81.  1!)1.'}.  show  that 
the  Canadian  hanks  held  on  that  date:  Dotninion  and 
provincial  <4overmnent  seein-ities.  >^!».()()l».H(;r.  Canadian 
imim'cipal  securities  and  Hi-itisli  and  foreiuii  public  se- 
ciwities.  J^-J.'J.H-JTJil.'J:  railway  and  other  bonds,  deben- 
tures and  stocks.  •S(;7.()21..-)41.  The  l)anks  have,  there- 
lore,  a  considerable  and  direct  interest  in  many  inchistrial 
enterprises. 

.y.ii.  Loans  to  dircctors.—  Vudvv  the  act  the  share- 
holders may  make  by-laws  linutin<^-  the  amount  of  a  loan 
to  any  individual  or  corporation.  As  a  matter  of  j)rac- 
tice  tliis  is  left  to  the  directors  to  decide.  In  the  Tnited 
States  national  baid<s  are  not  permitted,  under  the  act. 
to  lend  more  than  10  per  cent  of  their  paid-up  eai)ital 
to  any  person  or  eori)()ration.  An  attempt  was  made 
to  introduce  some  sucii  restriction  in  the  revised  Ca- 
iKidian  act;  but  it  was  stron<>-ly  opposed  by  the  banks 
and  failed  to  carry.  An  effort  was  made,  too,  to  place 
a  limit  on  loans  made  to  the  directors  of  banks;  but  this 
amendment  was  also  defeated. 

It  is  true  that  several  small  banks  have  failed  be- 
'•ause  the  chief  executive  ollicers  either  misai)j)ropriated 
iir  speculated  with  their  funds.  Hut  that  has  hai)penc  1 
generally  wiiere  the  institution  was  a  "'one  man"  bank. 
In  the  case  of  the  failure  of  the  Ontario  Baid<  the  «'en- 
'  ral  mana<4er  speculated  with  the  banks  funds  in  Wall 

Strri'f-   mihI    flic  /lii-<.<.f<ir>.'  It  ,.!..>   .,\\...v..A    ^..  1 1.^, 

-        ■    . :     ^     •  :     .        ..,..;.    ;  ,,^  L  1  i    •  i  -^  ^ 

liM'ent  in  safeouardiiio-  the  bank's  interests.     The  Sov- 
ereinjn  and  the  Farmers"   Hanks  were  forced  into  liciui- 


460 


MO\F,V    AND    RANKIXC; 


(lation  tlirounli  exces-iive  and  speculative  investments 
made  npnn  tlu-  authority  of  the  directors.  However,  all 
these  I'aihires  occurred  i-atlier  tlir()u<xli  t!ie  malpi'acticc 
ot  the  batd<s"  chief  officers  or  thrrai^h  an  error  of  judji- 
ineiit  on  the  part  of  the  directors — as  in  the  case  of  the 
Sovercij^n  Bank — rather  than  because  of  loans  to  the 
directf)rs. 

The  hanks  seek  to  tret  men  to  act  as  directors  wlio 
are  ])rominent  in  the  husiness  community.  The  accounts 
which  these  meii  brinfi;  to  the  banks  are  anion<x  the  nio^t 
\ahiable  the  hanks  ]iossess.  The  imsiness  of  the  directors 
is  a  \  ital  asset  in  building  up  a  baid<.  Now.  if  a  director 
could  not  ffet  a  loan  from  his  own  bank  it  is  just  possi- 
ble that  he  would  lose  interest  in  its  operations,  and 
refuse  to  act.  ;nid  thus  the  services  of  the  most  desirable 
men  in  the  eoinmtuiilN    would  be  |e  t   to  the  institution. 

It  has  bei  n  charj^cd  that  directors  who  act  for  other 
corporations  also  in  that  capacity  (li\  ert  the  baid<'s  funds 
to  the  enterprises  in  w  Inch  'hey  ai"c  interested.  It  comes, 
in  the  last  analysis,  to  a  (|U(  stion  of  the  advisability  of 
interlocking  directorates.  'I'his  is  a  situation  that  must 
inevitably  arise  under  modern  business  conditions.  Men 
of  l;n'<i'e  cajiltal  are  interested  in  many  enterjirises:  and 
there  seems  to  In  no  uood  re.'ison  wbv  a  director  of  ;i 
bond  house,  a  trust  company  or  .in  iftsurance  com|>an\ 
should  not  also  ha\e  a  seat  on  the  board  of  a  bank. 
Xor  should  they  Ix.'  discriminated  afjainst  in  s-curinu  a 
lf):m  I'oi'  th-.'mselves  or  the  eorpor.-itions  in  which  tluy 
ha\e  an  inleitst,  provided,  always,  they  rccei\c  no 
favors  and  tliat  the  loans  are  leuaily  made. 

As  nas  been  said,  ro  limit  is  pliucd  in  the  act  upon 
the  amount  of  a  loan  to  any  person  or  cor|ioratioii.  |! 
appears  to  be  the  ^encr.'il  consensus  of  opijiion  ;uni>nL; 
bankers  and  business  men  in  Canada  th  it  nothinu'  of  am 


CANADIAN    IJANKING    rilOBLKMS 


i07 


■••tu 


\;ilue  is  p'ained  by  .such  restriction.  Mr.  TI.  C.  McLcod 
qiajTested  to  tlu>  C'otiimittce  on  Hanking  and  ("oinnicrcc. 
(Ill  the  occasion  of  the  last  rc\  ision  of  \hv  act.  that  a 
limit  of  2.5  per  cent  of  the  haids.'s  caj)ital  should  he  im- 
!  (vsed.  The  sufjofcstion  met  ^^■ith  some  aj^proxal:  hut. 
the  \\lioh'.  it  was  felt  that  any  hmitation  upon  loans 
\MiMld  not  he  in  the  hest  interests  of  the  hanks  oi-  the 
{ountry:  and  that,  in  any  c.,sc.  it  would  he  dilticult  of 
(iiforcement.  In  a  word,  it  is  i'elt  that  fluidity  and  secu- 
I'ily  are  more  imi)oi-tant  than  tlu-  mere  a-nount  loaned. 

.Y'i.'i.  Haul's  ami  the  trust  ct  iiipanicft. —  Some  of  the 
Canadian  hard<s.  following  American  precedent,  have 
istahlisiied  trust  companies  to  take  care  of  husiness 
vli!(h  cannot  iic  leoally  undei'taken  hy  them.  Sir  Kd- 
iHiiiul  Walker  ha>;  <^i\en  reasons  why  this  policv  ap])eals 
t  the  hanks.  Tjie  Canadian  Hank  nf  Commerce  has 
not  estahlished  a  ti'usf  conipany.  hut  it  ha  >  at  times  hecn 
inclined  to  do  so.  This  hatd<  has  nearly  !^"J. ()(»(». ()(»()  in 
pension  funds  helonoinn-  to  it-  otfii'crs.  which  is  larj^cly 
iii\est(<l  in  mort<.,M<>-es  in  wcsfci-n  farm  lands.  It  oh\i- 
(Uisly  iinohcs  much  labor  in  looking-  after  such  lai-^e 
investments.  Such  a  fund  nnnlit  well  sfr\(>  as  a  foun- 
(Lition  for  a  small  trust  company,  in  l-aiM-land.  espe- 
ciidly.  many  investors  come  to  the  Canadian  Hank  of 
Commerce  v,  ho  \vould  like  to  \(  ]\(\  funds  on  ucstei-n  faifus 
ill  Canada,  and  in  other  ways.  These  tr.ansactions  ean- 
.lot  be  undei-t.aken  under  the  bank  act:  and  therefore  a 
cdnsiderablc  amount  of  profitable  business  is  lost.  Other 
Canadian  banks  found  themselves  in  the  same  condition. 
iUKJ  or«ianized  trust  companies  to  take  care  of  this  class 
iif  l)usiness.  Of  couise.  it  is  another  <iuestion  altooctber 
if  the  tiiisl  eiimpany  dipcnds  on  the  banks  for  funds  to 
iiivc.st  in  ways  not  enntemplalid  \>\  tli<  l»ank  act.  Aside 
from  tliat  Ihei-c  dors  not  a|)pear  to  be  an\    it  asnn  why 


m 


ili 


^ 


468 


M()^l:^   and  haxkint. 


th'J  hanks  should  not  or^aiii/c  ti-ust  coinpaiiirs  and  IkiM 
stock  in  tlicin.  Tlicix'  is  no  reason  why  shareholders  f>\' 
a  hank  siioiild  not  permit  the  formation  of  sueh  a  com- 
pany, and  ^u  in<4'  to  it  the  husiness  that  cannot  l)e  legally 
undertaken  hy  a  hank. 

It  has  hei'ii  c'harj^fd  that  the  direetoi's  of  some  of  tin 
^.  anadian  hanks  are  also  directors  of  tlu'se  suhsidiaiy 
companies,  and  that  they  exei't  an  undue  inlluence  in  ><- 
cuiin<i'  loans  from  the  hanks  for  them.  Hut  the  conten- 
tion is  hardly  hoiMie  out  l)y  the  facts.  As  a  rule  directois 
are  not  favoi'cd  aho\-e  othei'  horroweivs.  Hut  they  ouiilit 
not  to  he  discriminated  ayainst  merely  iKcnise  they  arc 
directors.  In  tlu'  case  of  the  l''arniers"  lank  it  is  trm 
that  it  was  ruined  l»y  an  excessive  loai.  )f  S7(((t.()()()  In 
the  Keele\-  mine:  hut  althouLih  mistakes  haxc  heeii  niadc 
it  does  not  follow  that  thousands  of  other  lei^itimate  ami 
j)rofitahle  transactions  should  he  foi'liidden  to  the  hanks. 

.').'{(>.  I  nil  rest  ch/ira.'i-'^  in  tlic  Wist.  The  act  permits 
haid<s  to  chai'^^c  7  per  cent  on  loans;  hut  no  hiuiiei-  raic 
is  reeo\ei'ahle  at  law.  This  is  a  matter  o|  more  oi-  |^s^ 
academic  importance  in  the  I'^ast  :  hut  in  the  West  it 
has  h((ii   an   impoiiaut    i-sue   amon<^'   the    ranchers  aiiil 


;rain-i4i'ow(rs. 


Mr.    (I 


iipman.    edi 


tor 


the    ( 


I  rath 


(ini:\.(rs'(^i/i(l(.  produced  ex  idcncc  hiloi-c  thr  ('iMiiiiiit- 
ti'i'on  Haidsin^  and  Commerce  ;it  ( )ttawa  in  April.  I'.M.'f. 
that   the  hanlo  had  heen  charjL'in''-  intciTst  in  the  \\'(  si 


di  th 


wa\-  froni  S  to  !•_'  iter  een 


t.      I 


n  sonic  cases  it  wa^ 


much   hi;4her.  especially  on    small    loans.      Some   hanks 
have  chargt  <l  one  dollar  a  tuonth  on  a  loan  of  ><■_',").      I'lii 


axera^c  r 


lie.  Iio 


>m  M  to  I  •_'  j)(  1'  (■(  nt  accord- 
in;^  to  t  lie  (list  r lets  w  Iieic  tlu  hank  is  located  and  the  p<  r- 
.son  who  receives  the  loan. 

The  people  of  tin    West  feel  that  they  have  a  griev- 
aiue  in  t!iis,  and  lia\(    souaht  to  h;u(    the  late  fixed  .it 


f^ 


(  ANADIAN    HA.\KI\(J    I'ROlU.ll.MS 


4G9 


7  jK  r  cciit  ill  all  {'ascs.  It  lias  liccn  c'niisc-i-\  ati\  rlv  t-sti- 
iiiatid.  li()\\c'\rr.  that  it  costs  on  an  a\(.Ta<>c  2  per  cnit 
iiioi'f  to  can-v  on  liankiii<^-  in  the  \\\'?t  tlian  in  tiu'  Ivist. 
On  tiu'  IVontiir  and  in  the  rciiiotcr  districts  tlu-  ditl'er- 
Micc  in  cost  is  niiich  liinlicr  than  that.  At  oiu-  time  the 
li.iiiks  were  chai'^inji'  -  !><■  I'f^'nt  a  nioiith  in  Dawson 
(  il\  :  ;uid  cvtn  at  that,  money  was.  i'elatl\  eiy,  the  chea])- 

I  ^t  coiiimoihty  there.     Ol"  coiirsi-  this  is  an  extrt-me  case; 
il   the  ^'ciieral  pl'iliciple  holds  true.     The  cost  of  sei'\ - 

is  ninch  liiLi'lier  in  the  West,  and  thi'  risk  is  <>'reater. 
l,(adin,n  hankers  ha\i'  insisted  that  if  the  statutory  rate 
<<\'  7  p<'i'  ct'nt  wvvv  enforced  many  of  the  hraiich  hanks 
udiiM  ha\'.'  to  he  closed. 

Mort<^-a^c  and  loan  companies  recei\e  8  oi-  0  per  cent 
"II  thiir  fiiiKJs;  and  the  cost  ol'  cxecntiim'  the  inort"'a<''e 
''!  iiius  the  loan  up  to  1  1  -  or  2  per  ctiil  hinher.  .\!4'i-ee- 
iiK  nts   for  sal(    yield   as  hiuli   as    If.   per  cent   and    moi'c 

>ii  the  money  iiixcsted.  Impliiiient  dealer^  ehai'yc  1  •_' 
|ii  r  cent  on  tlii'ir  customers"  notes,  and  these  ai'e  made 

III  at  credit  p'-ici's.  .Moreo\ ci'.  there  are  not  onl\-  vearl\- 
i'lil  s(  asonal  !hietuations  of  interest  i-ates  in  the  W'e^l. 
W  li<  n  thesi'  facts  ai'c  considci-ed  it  does  not  appear  that 
'lu  haiik^  are  charuin^i  (,\eissi\c  I'ates.  The  crux  of 
'!•  (iiieslioii.  therefore,  is  this:  |^  it  to  the  ad\aii!aLi'e 
I  I   Ihe  West    to  lia\e  money  at    ])re\  ailing'   I'ates  rathei- 

II  111  run  the  risk  of  decrea^inu'  the  sn|)pl\  of  capital  h\- 
.'ihitrarily  lixiny-  the  rate  of  interest'  It  would  not  In- 
praeticahle  or  just    to  impose  a   fixed   ?-ate  nf  7    per  cent 

II  till'  hanks  without  rcslrictiiiLt  also  the  rate  charwfd 
hy  otiur  tinaJicial  institutions.  An  i  normous  amoimt  ol" 
'ipital  has  come  into  Canada  m  recent  viars  from  (ii'cat 
Mritain.  Holland.  I'ranee  and  oIIki-  l-'nrnpi.'in  enuii- 
trii's.  A  tixi'd  7  p'l'  ceiil  inlii(^l  lali-  would  neccssaiaU' 
■  iU'ect  this  flow   of  ea|>ital.  and  I'cdiicc  its  \oliime.     The 


470 


Mo^■l;^■  and  banking 


legislation  would  (k'l'eat  its  own  (.'nds;  foiiipctition  woiiM 
be  (limiiiislied.  and  as  a  natui'al  rrsult  interest  i'at<  - 
would  rise  liiglier  than  ever.  Tlie  situation  will  gvml- 
iially  riulit  itself  as  the  c<junti'y  is  develo])etl.  and  local 
savings  heeoine  a\  ailal)le. 

5li7.  Haul's  of  siiuiU  aipitdl. —  It  has  been  ad\-oeate(l 
in  some  (inai'ters  in  Canada  that  l)aid<s  of  small  capital. 
relati\el\'  local  in  their  (i])<.-rati()ns,  would  reduce  the  in- 
terest rate  and  |)ro\  ide  sutHcient  accommodation  t'l  r 
local  purposes.  'I'he  W'eyhui'n  Security  liaiik.  of  \\\v- 
burn.  Sask..  has  been  cited  as  an  example.  This  b'aiik 
Avas  started  in  January.  IDll  :  has  an  authorized  eai)ital 
ot'$l.()()0.t)()(),  of  which  S(j;{i. ()(»(»  is  subseribeil  and  s;ji.-,.- 
(500  paid  u|).  There  are  seven  dii'cctors.  fi\e  living  in 
Canada  and  t\\o  in  the  I'l  '  States,  'i'he  institution 
Mas  started  by  six  wealth;  .1.  icricans  who  held  larqc 
business  holdings  in  the  W'eybui'n  district,  and  who  iVlt 
ihe  lack  of  bardsing  capital.  Mr.  llarxey  Powell,  tlu- 
general  managei".  has  h:  d  wide  expi'rieiiee  in  l)anking  in 
Wisconsin  and  Dakota.  The  baid<  has  paid  .5  ])er  cent 
on  its  stock  and  ear'i'ied  ><t!,).()0()  l(;  sui'plus.  There  are 
ten  branches  of  the  baidv  at  various  small  towns  in  tiic 
j)ro\  ince. 

'I'he  bank  di\  id(s  its  business,  .so  far  as  interest  rates 
ai'c  coneii'ni-d.  accordnig  to  the  class  of  customers:  tint 
is,  not  aceordnig  to  the  business  he  is  in.  but  according 
to  his  relation^  willi  the  bank.  Some  loans  are  granted 
at  7  |)er  eiiit.  but  the  ma|ority  are  made  at  8  per  cent. 
The  borrow!  i-  who  gets  his  money  at  8  per  cent  must  be 
a  depositor,  and  he  must,  moreoxer,  give  evidence  of 
being  a  fiisl-ilass  customer  in  tin-  future.  A  boiiowcr 
\vh(i  iji  11  -.  riiit  ilf-twisit  ill  ;!!!\'  ''xteut  !s  ebarjjt'd  !(.'  !!•!' 
cent.  'Ihe  man  who  eami(>i  pay  his  aceomil  when  din' 
is  charged   fJ  per  c(  iit   for  i'iiu\\al.     'I'he  baid\  "ttempt^ 


S.S    ^-* 


(  ANADIAN    BAN  KING    PROBLEMS 


471 


to  keep  its  loans  liciuid:  it  does  not  want  to  go  into  ])art- 
iRTsliip  '«'.  itii  the  borrower  in  a  rural  distriet. 

The  evidenee  given  hy  the  general  manager  ot   this 
hank  has  gone  to  show  that  the  rates  are  in  general  less, 
under  similar  eoiiditi()ns.  than  they  are  in  the   Tnited 
States.     He  agreed  witii  Mr.   Forgan.  president  ot  the 
1  irsl  National  Uank  ot  Chicago,  that  the  hranch  hank- 
iim  system  can  o])eratc  more  eeijiiomieally  and  turnijli 
hanking  facilities  more  cheaply,  as  a  general  rule,  than 
the  independent,  local  bank.     The  small  bank  ot  limited 
lajiitalization  could  not  compete  with  the  large  bianch 
hanks.     Mr.  Powell,  from  his  American  experience,  saw 
iiiit   one   adxantage   in    I'avor  of   th«     local    bank.      The 
<lirectors  of  a  local  bank  may  be  more  dee|)l\   interested 
in  thf  community  than  a  branch  bank  manager.     Aside 
from  that,  whether  with  reference  to  interest   ratis  or 
u<ti<ral   banking  fa(  .lities.  the  large   branch  banks   aie 
in  a  much  better  position  to  si'rve  the  public.     A  small 
Ideal  bank  must  deptiid  for  its  success  upon  the  pros- 
perilv  (if  the  locality  in  which  il  is  situated.     If  for  any 
reason  local  industry  shoidd  iei-ei\''  a  setback,  the  bank, 
too.  is  bound  to  suffer.    This  occurred  when  the  wooden 
shipbuilding   industry  of   Nova    Si'otia   declined   at   the 
advent   <-i'  steel  ships.      The  small    local   baid<s  suffered 
liea\il\-.  .tiid  \Mre  obht^ed  to  i  lose  ♦heir  doors.     On  tlie 
other  hand,  a  branch  bank  may  be  closetl.  if  necessary, 
v.  ithout  check  t"  the  institution  as  a  whole.      This  has 
been  illustrated  time  and  time  again  in  Cana<Iian  bank- 
ing, especially  in  the  West. 

,").iH.  Iiili,i.si  oil  (hpunits. — Cansidera!>!e  dissatisfac- 
ti(.n  has  arisen  among  Canadian  depositors  because  the 
banks  do  not  pay  greater  interest  on  deposits.  The 
ordinar\  rate  on  deposits  is  :}  per  cent,  although  the 
W.  vburn   Stcuritv    liank   pays    t   per  cent.     This   rate 


47-2 


MOXKY    An  I)    H.WKIN'C, 


ill 


'U? 


c'onipiircs  t'a\()r;il)ly  v.itli  that  of  hanks  .similarly  situalid 
in  the  I'nitcd  States.  The  C'hiea^o  hanks,  for  exani])li, 
pay  '2  per  eent  on  daily  halanees  of  eonnti'v  hanks  left 
with  them.  They  do  not  |)ay  interest,  as  a  rnle.  to  a  cns- 
tomer  who  makes  arrangements  to  he  a  horrowinn 
customer:  hnt  if  they  ha\e  a  lar^e  account  where  the  cus- 
tomer does  not  want  to  l)oi'ro\\'.  and  wheiv  he  is  essen- 
tially a  depositoi',  they  de(hiet  a  sum  which  must  he  in- 
terest-free and  which  w  ill  meet  the  expenses  ol'  carryinu 
the  account.  j)ayini4'  -  pt'r  cent  on  the  halance.  Of  course 
in  active  centers  as  much  as  1-  ])er  cent  is  paid  on  deposits, 
principally  iiy  trust  companies.  A  national  hank  undei- 
normal  conditions  cannot  pay  more  than  .'J  ])er  eent. 
although  in  some  oi'  the  Western  States  4  ))er  cent  is 
|)aid. 

()wiii<r  to  keen  com])etition  hi  Canada,  hanks  ])ermit 
checks  to  he  drawn  against  sa\  iu<4s  accounts.  Moreover, 
very  small  sums  ai'c  cai-ricd  as  curivnt  accounts,  for  the 
sar.ie  reason.  On  these  accounts  the  hanks  actually  lose 
money:  hut  they  ai'c  not  disciiminatcd  a<>ainst,  so  ^reat 
is  the  comjKtition  to  sei-urt'  additional  i)usiness.  There 
is  no  olliei'  coimtry  in  tin  world  wlier<  service  of  this 
kind  is  pro\  ided  to  such  a  deni'ce  foi-  noihin^".  Persons 
kce|)in;^'  an  account  of  lifty  or  sixty  dollars  arc  j)ro- 
\  ided  with  a  check  hook  and  complete  hankin*:!,'  I'acilities. 
The  cost  of  tliis  s(  r\  ice  is  ahont  .'{  cents  ])er  check  in 
the  castci'n  ollices  and  .'{'  o  cents  to  .1  cents  in  the  West. 
according  as  tlu  cheek  is  drawn  uixtn  a  citv  or  countrv 
ollice. 

It  is  iiue  tlial  in  Ih'  Ivisl.  es|)eeially  in  ilu'  maritime 
pi'o\  inces.  tin  deposits  exceed  the  loans,  .-iiid  the  surplu<« 
is  sent  to  other  pai'ts  of  the  Dominion  where  there  is 
an  active  demand  for  capital.  It  has  e\cn  hten  suj^- 
gcsted    that    the  deposits   of   a    |ii<i\iiice   should    he  em- 


(  ANADIAN    HANKINC;    TKOHLKMS 


ployed  there  in  l)iiil(lin<i'  up  local  iiidiisti-ies.  To  this 
the  hanks  reply  that  they  ha\e  always  met  every  de- 
iiiaiid  made  upon  them.  They  eannot  take  the  initia- 
tive: tlie  j)eo])le  must  (h)  that  for  themselves.  From 
\\liat  has  been  said.  too.  it  aj)pears  that  .*J  ])er  eent  is  a 
fair  retin-n  upon  deposits  in  the  Kast.  There  loans  are 
made  at  .>  or  (i  j)er  eent.  which  affords  the  bank  merely 
;i  fair  retui'ii  u])on  the  cost  ol'  the  sei-\  ice  rendered. 

y.iU.  FiiKiiiciiii:;  tJic  crops.-  The  obvious  i)eculiarity 
of  agriculture  is  that,  o\vin<>-  to  tlie  charactci-  of  the 
Canadian  chmate.  but  one  crop  per  annum  of  a  ^iven 
kind  is  harvested.  The  si<i'niticant  rehition  of  the  farmer, 
tiierefore.  to  the  bankin<i'  system  ai'ises  out  of  the  fact 
that  the  hainestin^  of  the  rei>idar  staple  crops  of  the 
(ountry  such  as  wheat,  oats.  flax,  barley  and  others,  is  a 
siasonal  operation.  'I'his  is  the  one  im|)ortant  fact  wliieh 
distinj^uishes  the  tinancino-  of  ajj,iicultui'al  operations 
iVom  that  of  manut'aeturini^-  and  commerce.  In  regions 
which  are  mainly  agricidtural.  the  seasons  of  the  year 
\\hcn  the  products  of  the  soil  arc  bein<4'  marketed,  are 
the  seasons  when  large  calls  are  made  upon  the  banks 
for  loans. 

'i'here  are  few  lines  of  industry  where  anythin<i;  like 
the  same  seasonal  ebb  and  How  of  trade  is  found.  Some 
classes  of  manufactures,  to  be  sure,  are  to  some  extent 
dependent  upon  climatic  conditions  ujxtn  the  s})rinj4 
■iv  the  fall  trade,  l''or  example,  the  gcneial  retail  trade 
ex])eriences  sharj)  upward  moxcments  in  demand  when 
the  seasons  are  changin<.j,  and  a  correspondinjj,'  de|)res- 
Mon  at  the  height  of  the  season,  iiut  bi'ueatii  all  these 
lluctuations  thci'c  is  a  steady  current  of  e\clianges  wl  ieh 
ni.iiv'  1)0  counteil  iiiK)!!  f hroiiirhout  the  \'ear. 

As  has  already  been  explained,  tlie  Canadian  farmer. 
especially  in  the  West,  needs  money  not  only  to  pay  his 


474 


MONEY   AND   BANKING 


?■••; 


harvest  hands,  the  expenses  of  thi'esliing,  etc.,  but  \ 
pay  accounts  due  to  tlie  merchant  and  the  iniplenienl 
ilealer.  These  accounts  are  generally  small  in  the  indi- 
vidual case,  but  in  the  aggregate  they  amount  to  an 
enormous  sum.  The  farmer,  too.  has  often  secured  an 
advance  from  the  bank  to  meet  his  temporary  needs, 
merely  on  the  strength  of  his  pei'sonal  character  and 
credit.  'I'o  discharge  these  obligations  lie  must  depend 
upon  the  salt'  of  his  crops.  It  is  thi'ough  tlie  banks  that 
money  is  fui-nislied  to  the  ])r()ilucers  and  the  niiddlo 
men.  while  the  j)roducts  of  the  farm  are  on  their  way 
to  the  customer.  A  heavy  burden  rests  upon  the  char- 
tered banks  during  this  j:)eriod.  and  their  note  issues  are 
stretched   to  the  utmost   limit. 

During  this  time,  when  linancial  facilities  are  strained 
to  the  utmost,  lielj)  from  any  good  (juarter  is  acceptable. 
During  itcent  years  financial  arrangements  have  been 
entered  into  bttween  Canadian  and  British  banks,  to 
assist  in  the  movement  of  grain.  London  bankers  have 
found  it  such  a  satisfactory  luid  remunerative  business 
that  they  are  ordy  too  glad  to  guararitec  advances,  if 
necessary,  to  a  larger  measure  than  before.  The  secu- 
rity is  iMideniably  sound;  and  London  bankers  have  been 
enabled  in  many  cases  to  earn  substantial  connnissions 
merely  by  a  guarantee,  without  the  actual  emission  of 
cash. 

540.  Moling-  the  tccsfcru  xclifat  crop.— The  new  pro- 
visions of  the  act.  whieh  permit  the  baid<s  to  issue  addi- 
tional notes  on  legal-tender  money  held  in  the  central 
gold  reserves,  will  materially  atfeet  th.e  methods  of  the 
banks  in  providing  curiency  for  moving  tlie  crops.     It 


II       Iw. 


-wl    f!,..t    +1,., 


.1,1 


,1    T»., 


deposited   with   the  trustees   in   Montreal,   upon    which 
additional  note  issues  are  based,  will  not  be  available  as 


(  ANADIAN    BANKING    l'UOlU.i:.MS 


ir.5 


;i  |);irt  of  a  l)ank"s  reserves.  Altli()u<iii  tliis  is'^ue  is  not 
Mil»j('et  to  a  tax.  some  hanks  will  undoubtedly  preter  to 
issue  additional  eurreney  on  tiieir  eajiital  and  surplus, 
upon  wliieli  they  must  pay  a  tax  not  to  exeeed  .3  ])er 
cent.  It  will  he  recalled  tliat  the  tcjtal  amount  of  this 
einergencv  issue  is  fixed  at  1.)  per  cent  of  a  hank's  eom- 
hined  paid-uj)  capital  ami  surjjlus.  The  hanks  tliat  are 
.inxious  ahout  their  reserves  will  undoubtedly  i)rcfer  to 
j)ay  tlie  4  per  cent  tax  rather  than  deplete  their  lujld- 
inus  of  u'old  and  Dominion  notes.  The  amount  of  addi- 
tional  currency  needed  at  the  crop-moving  period  is 
about  >i<'J(). 000.000.  Part  of  this  has  been  furnished  in 
Dominion  $4  and  «.3  notes:  l)ut  it  is  altogether  likely 
that,  for  the  future,  the  banks  ^vill  pirfer  to  issue  (july 
their  own  notes,  as  these  can  now.  through  the  gold 
i(ser\es.  be  |)rocure(l  as  easily  as  Dominion  notes. 

Fresh  supplies  of  notes  are  prepared  by  the  banks 
Hi  the  summer,  and  an  estimate  made  of  the  amount 
reciuired  at  the  different  branch  oltices.  (H-ain-buying 
firms  arrange  a  line  of  credit  at  the  banks,  and  at  the 
time  of  del'xcry  of  the  giain  at  their  elevators,  secure 
notes  from  the  bank  to  make  the  re(iuired  payments 
to  the  farmers. 

x\s  the  grain  is  bought  it  is  j)ut  tlirougli  the  eleva- 
tors and  loaded  on  cars  for  Koi  t  William.  I'ort  Arthur 
oi'  Duluth.  the  terminal  points  on  Lake  Superi(jr,  When 
tjie  grain  is  loaded  on  the  cars  the  grain-buyer  receives 
from  the  station  agent  a  l)ill  of  lading  for  a  number  of 
busiiels  the  ca|)acity  of  the  cai'.  'I'he  gi-ain-ljuyer  turns 
these  bills  over  to  the  hank  as  security  for  loans  made 
to  him.     The  bank  loan  grows  steadily;  each  (hiy  luw 

re  receivcvi  :d 


..      lv...,,,,.l.        ), 


.wl 


^iippiics   oi    iii''ier>   ; 

issued  to  the  grain-buyers.     During  this  time  the  grain 
is  on  its  way  to  the  lake  pints.     From  time  to  time  the 


'4i!i 


4; 


470 


MOM  ^     AM)    H.\\KI\(, 


1  > 


hi-  ■ 


,1"- 


\niyvy  .^rlls  to  Winiiiprn-  exporters,  or  lo  tlie  hiu'  „,illi„n 
companies.  He  draws  a  .IraTt  upon  tlie  exporter  or  tlie 
luillino-  eoin|)any,  to  wliieli  hills  of  ladiiiu'  -'ire  attaelied 

I'V  Ins  hank.     'Die  hank  applies  the  ai nt  of  the  draft 

f"  the   loan  made  to  the  ,uraind)nyer:  and   instrncts  its 
'"■-•I'lch  at    W'innipe.u'.   to  which   the  draft   is   forwarded, 
to  (icHver  the  hills  of  ladin.u  and   insnranee  receipts  to 
the  e\|)orter  or  miller,  as  the  ease  m.ay  he.  onlv  on  pay- 
ment   iA'    the    draft.      As    deliveries    .if    urain  "from    the 
farmers  cease,  the  (k-mand  tor  the  haid^'s  notes  slackens: 
and  t!ie  -rain  dealer's  indehtalness  falls.     1  f  a  firm  does 
not  ncl  out  its  oiviin  htt'oiv  navigation  closes  on  the  lakes. 
It  may  stori'  it  in  its  elevators,  prelerrino  to  keep  it  until 
the  sprino-  rather  than  ship  it  to  Portland  or  St.  John 
l»y  the  all-rail  route.     In  that  case  the  hanks  may  carry 
iiic  dealer  all  throunh   the  winter.      In  addition"  to   th"e 
'•ountry  huyers   the  aueuts  of   the   Winm-pe--  exporters 
antl  of  the  hio'  millers  will  he  huyino'  from  the  farmers. 
This  husiness  is  financed  in  the  same  way  as  that  of  the 
small  oTaiu  firms,  hut  at  \\'innij)eo'  hanks. 

Jn  W'innipeo'  and  other  cities  the  l)io'  exi)ortino.  firms 
send  out  lar-e  amounts  of  cash  to  the  centers  at'^whieh 
they  havi'  elevators.     They  also  acce|)t  the  drafts  drawn 
iipoM  them  hy  country  deak'r>:  so  that  their  indehtediiess 
to  the  hanks  is  constantly  increasino-.     'rh^  security  for 
these  haidv  loans  consists  largely  of  wjieat  in  store  at  lake 
ports.     Jiy  sales  and  shipments  fiom  lliese  points  their 
accounis  at    the   hanks   are   li(|uidated.      W'iien   a   hoat- 
l'>.i<l  ')f  ,urain  sails  fiom  an  upper  lake  port  for  HulValo 
and    New    N'ork.   or    ilirou-li    the    Weiiand    Canal    for 
-Montreal,   the  haul,   hnys  the  sterlin-'  hill  of  exchanoe 
with  the  hills  of  ladinu'  attached  Iherrto..     '\'\u>  I.,!..,,  hTu 
of  ladinn-  is.  of  course,  ixclianovd   for  an  ocean   hill  of 
•'"•'"f^'  ''^   *li^'   l'<'i"t    <••'   ^Iiipment.      When    the   sterlin- 


(•A\.\1)I.\N    HANKINC;    1'H()15M;.MS 


477 


liill  i)['  I'xcliaiiu'c  is  drawn,  with  in  ocean  l)ill  of  lading 
,111(1  insnraiift'  receipt  attaclied.  the  l>ill  is  iisually  sold 
ill  .W'w  ^'(M■k.  Thus  the  hank  and  the  exporter  hoth 
lia\e  theii'  money. 

The  hank  notes  u'radually  i-etnrn  to  the  hanks  as 
the  farnieivs  and  the  merchants  settle  tlieii'  acconnts.  ^Vn 
(Mormons  credit  hnsiiuss  is  cairied  on  in  Canada.  esj)e- 
eially  in  the  West.  When  these  accounts  are  settled  the 
notes,  as  has  heen  said,  gradually  return  to  the  ))anks 
eitliei-  to  he  deposited  or  to  pay  ofli'  loans  to  the  hanks. 
'I'lie  notes  thus  I'orm  an  elastic  medium  of  exchanu'e. 
expanding'  and  contractiiif^  as  the  need  re(]uires.  They 
cMst  tlu'  hanks  \ei'y  little,  aside  from  the  expense  of 
piintin,!^'  them,  exeipt  in  the  cast'  of  the  tax  on  the 
u!ieo\ fi'ed  enR'r<4enev  circulation.  That  tax  is  not  paid 
until  the  notes  are  actually  placed  in  cii-culation :  hence, 
they  may  he  held  as  till  money  at  a  trivial  expense. 
'I'his  is  an  ad\anta^e  not  generally  recofrnized:  hut  it 
results  in  \ery  lar^e  savings  to  the  l)ank. 

.")41.  C'onninrcidI  letters  of  credit  in  CaiimJn. — \\Miile 
the  })anks  ])lay  a  \ery  imj)ortant  pai't  in  the  way  just 
descrihed  in  the  export  trade,  they  play  an  ecpially  im- 
|)oi'tant  I'ole  in  aiding  manufactureivs  and  wholesalers  to 
lii'ing  goods  into  Canada.  Indeed,  one  of  the  most  im- 
poi'tant  functions  of  the  hanks  is  to  facilitate  the  impor- 
tation of  merehan<lise  into  the  country. 

When  a  Canadian  merchant  or  manufacturer  wishes 
to  import  goods  from  ahroad,  he  may  settle  for  his  pur- 
chase hv  any  one  of  the  three  following  methods: 

(  I  )  He  may  s(,nd  the  expoi'ter  a  draft  on  a  Loudon 
I)ank,  in  payment  for  the  goods,  along  with  the  order. 
This  in\(il\cs  risk  in  regard  to  the  (juality  of  the  goods, 
as  well  as  loss  of  interest  on  the  amount  !)ai(l  for  them, 
lience.  tlii<  method  is  seldom  followed. 


'if 


-I 
HI 


m 


478 


M0\1■.^     AM)    H ASKING 


(2)  Wlieo  sfrHiiii^'  liis  onler  lie  may  instruct  the  ex- 
porter to  draw  on  liim  in  payment,  eitlier  at  sight  oi 
alicr  notice.  accoivHtiu  to  whatever  teiins  have  hecn 
agreed  upon.  'I'o  such  a  rli-alt  (ioeuments  (  hill  oi'  l-idinu-. 
insurance  i-tciipt.  etc.)  u  ill  W-  attached  to  he  (kli\tred 
to  the  Canadian  importi  r  upon  acce|>tanee  of  the  draft. 

As  the  first  iiK-thod  might  iinolve  loss  to  the  C'a- 
nadian  importei-.  so  iniujit  the  secoifd  to  the  Knglish 
exportir.  It'  the  Canadian  customer  wvvi-  unknown  to 
the  exporter  the  ordei'  would,  no  (h)uht.  he  deelinefj:  be- 
cause, if  his  (haft  were  rtfused.  he  would  he  compelled 
to  .NKM-ifiet-  his  goods  at  foiv  id  sale  in  a  strange  country. 
Credit  relations  of  this  sort  are  usually  arranged  in  ad- 
\ance. 

But  even  if  the  Canadian  .should  he  a  highly  trusftd 
customer,  the  exj)orter  in  Spain.  Italy,  (ireece  or  (.er- 
many  would  have  to  i>ay  an  exceptionally  hi  '  rate  if 
he  wished  to  discount  his  draft  on  a  Canadian  I, 
same  holds  true  to  a  less  extent  for  the  Knglish  expoi , 
This  would,  of  course,  all'c-et  the  ])riee  the  exporter  could 
<|Uote.  to  the  dis.uh    ntagc  (>f  the  CanadiaTi  merchant. 

(3)  The  most  .satisfactory  method  to  all  concerned, 
as  Avell  as  the  one  most  usually  employed,  is  the  use  of 
the  commercial  letter  of  credit.  When  a  merchant  or 
nianufacturei'  wishes  to  impoi-t  any  considerable  quan- 
tity of  goods  he  applies  to  his  bank  for  a  commercial 
letter  of  eredit. 

In  the  ;ii)plication  to  the  bank,  he  gives  full  j)articu~ 
lars  with  regard  to  the  name  and  address  of  the  exyiorter. 
the  terms  of  the  draft  to  l»e  drasv  ti  in  pavment.  date  be- 
fore which  the  goods  must  be  shipped  and  their  destina- 
tion, total  amount  which  may  be  drawn,  also  whether 
the  goods  are  insured  liy  the  exporter,  or  in  Canada  bv 
the  importer.     Then,  when  the  ai)]ilication  is  granted  bv 


CANADIAN    l{ANKIN(i    l'R01H.r.M> 


Hi) 


to 


ill.-  liMiik.  \\\v  customer  receives  a  letter  of  eredil  wliuli 
I,  t'oi-wanled  with  his  order. 

'I'liis  letter  of  credit  iiiithorizes  tlie  exporter  to  d'-aw 
.,11  the  London  aoviits  of  the  hank  or  its  an;eiits  in  any 
othv'r  eitv.  np  to.  hut  not  exceeding,  a  certain  amount  of 
pounds  sterling.  Such  a  draft  must  he  aceompani((i 
hv  a  certified  invoice  and  hill  of  lading  made  ou^  to  the 
Older  of  the  hank,  for  goods  siiipped  to  the  Canadian 
ciistonier,  according  to  the  terms  of  the  letter  of  credit. 

\V1  en  the  e\i)orter  ships  the  goods  he  draws  on  the 
London  bank:  and  j)resents  the  draft  with  the  relative 

tcunients  attached,  together  Mith  his  letter  of  credit, 
his  own  l)ank.  The  hank  will  at  once  discount  the 
hill,  and  the  exjjorter  thus  receives  his  money  even  before 
the  goods  mav  have  left  the  coimtrv. 

As  London  is  the  clearing  center  for  Kuro])e,  docu- 
iiientary  bills  of  exchange  are  discounted  at  a  very  low 
rate  of  interest.  IJoth  the  exjiorter  and  the  importer 
gain  by  this  ])rocedure:  the  former  receiving  his  money 
without  risk  of  loss,  and  the  latter  getting  a  better  price 
ijuoted  on  the  goods  lie  buys. 

i'h.e  Cannd'i-n  bank  has.  in  the  meantime,  forwarded 
to  its  London  branch  an  exact  copy  of  the  letter  of 
(ledit;  so  that  when  the  branch  bank  has  presented  i  • 
it  the  draft,  with  the  necessary  documents  attached,  it 
at  once  accepts  it.  The  documents  are  then  forwarded 
to  the  Canadian  branch  which  granted  the  credit,  to- 
ffetlicr  with  advice  of  the  date  and  amount  of  the  draft 
which  has  been  drawn  against  tlie  credit.  The  Ca- 
nadian customer  is  then  notified  that  the  bank  liold^ 
the  bill  of  lading,  etc..  and  that  he  may  receive  these 
bv  meetiniT  the  amount  due  upon  the  draft.  If  the 
draft  drawn  by  the  exporter  i-  t  sight,  the  equivalent 
('\'  the  amount  will  be  charged  .n  once  against  the  cus- 


'J 


ISO 


MOMA     AM)    I5.\NKIN{; 


tomci-'s  ac't'oiiiit.  The  (locuiiiciits  .U'iving  title  to  tlio 
goods  will  tl'en  he  turned  over  to  him.  But  if  the 
draft  should  not  mature  for  some  time,  the  customer  must 
execute  a  trust  receipt  hefore  he  can  gain  possession  of 
the  merchandise.  In  tliis  receipt  he  ])le(lgcs  himself  to 
hold  the  goods  in  trust,  as  the  j)roperty  of  the  bank,  until 
the  (h-aft  is  ])aid.  In  this  way  the  letter  of  credit  })lays 
a  veiy  inii)ortant  jiart  in  the  carrying  on  of  the  country's 
ini|)oi't  trade. 

.■>l'-'.  ('(iit<i(li(ui  clearing  houses. — The  Canadian  clear- 
ing methods  arc  carrit'd  on  partly  hy  means  of  credit  and 
partly  hy  cash  si'ttlemcnts.     Three  systems  are  followed: 

(  I  )  At  the  lai-ger  centers  are  clearing  houses  of  the 
ordinary  t\  pc.  wluic  the  balances  arc  settk'd  in  cash. 
As  a  matter  of  con\cnience  tlie  banks  use  for  this  pur- 
pose Doininioii  Icgal-ttiidcr  notes  of  lar'ge  denomina- 
timi.  which  ••irc  issui'd  e\|)rcs,sly  for  .'is  j)urpose. 

(2)  At  some  cities  of  the  -•  ond  lank  tiu'i-c  arc  clear- 
ing houses  of  the  ordinary  j,c:  but  the  resulting  bal- 
ances ai'c  settled  by  checks  di'awri  ori  central  i-ities. 

(.*{)  At  the  i'cmainin}4'  ofliees  which,  of  course,  cover 
the  bulk  of  the  branch  ofliees.  exchanges  are  made  di- 
rectly bitwccn  the  baid<s.  aiu.  the  resulting  balances 
settled  by  draft  on  the  nearest  local  tinanc-ial  center. 
Tliroughoiil  Ontario  and  '^ucIm  c  x  I tlcnient  checks  are 
dr.iwn  (  .  Toronto  or  Montreal;  in  the  maritime  pi'o\ - 
inccs  on  Halifax  or  .St.  .John;  in  the  |»rairie  provinces 
upon  Winnipeg:  and  in  liritish  Coliiiubia  on  \'ictoria 
and  \  aneoin  (  I'. 

It  should  1h  obxrvcd  that  llic  Canadian  clearing 
houses  have  di'.elopcd  no  special  functions  such  as  the 
.\merican  clearing  houses  ha\c  done.  In  the  I 'nited 
States,  jis  is  '  known,  the  functions  (  t'  the  i-karing 
lu)iises  lia\e  .n.lcd    'ar  bcvond   ilu  ir  orininal   \\u\\\-: 


CANADIAN    iJANKlNC    1M{()HI,1;MS 


4S1 


until  tlu;  clearing'  houses  to-day  arc  ccntcis  tor  united  ae'- 
tion  anion<^  the  hanks.  'I'liey  re<4ulate  all  (juestions 
atf'ccting  their  mutual  welfare,  sucli  as  unii'orni  rates  of 
interest  and  exchange,  as  well  as  otjier  (|uestii)ns  mT 
gi-eater  iin})<)rtance  to  then..  It  is  hy  united  action  that 
the  hanks  have,  in  the  past,  heeii  ahle  to  succcssl'ullv  meet 
a  crisis  hy  the  issue  of  clearing-house  certificates.  In 
C'an.ida,  on  the  other  hand,  all  matters  of  imjjortance  are 
settled  eithei-  hy  the  e\ecuti\es  of  the  different  hanks  or 
liy  tlie  Hankers'  iVssociation.  the  clearing  house  ])laying 
no  part  whatever  in  such  matters. 

In  London  tlu'  clearing-house  system  is  very  much 
the  same  as  in  Canada.  (  \ce])t  that  no  cash  is  lieared 
owing  to  the  fact  that  tlie  Bank  of  Kngland  has  a  mo- 
nopoly of  tiote  circulation  withiti  the  city.  Balances  are 
|)aid  hy  check  on  ilie  Bank  of  Kngland.  with  whom  all 
tlie  other  hanks  keep  accounts.  In  the  l''i:ghVh  |)ro\- 
inces.  as  well  as  in  Scotland  and  Ireland,  the  clearing 
house.',  are  conducted  along  almost  the  same  hue  as  in 
Canada. 


I* 


\  i 


C_VII— 31 


it 


CirAPTKK    XXXII 


THE  RANKS  AND  THE  GOVERNMENT 


5i.'J.  (rovrrninciit  note  i.ssiics. — The  ])a|KT  money  of 
Canada  eoiisists  ol'  government  notes  and  hank  notes. 
The  t'oi-mer  are  a  full  legal  tender;  hnt  the  hank 
notes  are  iinested  with  no  legal  (|uality  whatever,  nn- 
less  the  ohiigation  resting  npon  the  hanks  to  accept 
their  own  notes  on  presentation  may  Ik' considered  such. 
The  amount  of  Dominion  notes  outstanding  has  in- 
creased rapidly  in  recent  years.  In  1!M)()  the  total  was 
only  !i<2(;.:).-)().4(;.'}:  in  lOia  (April  .'{Oth)  the  amount 
Avas  $1  K}.T4(),7.'{.'{.  These  notes  are  of  the  following  de- 
nominations (exclusive  of  $"J7.7S.5  of  former  provincial 
issues  not  ledeemed,  and  fractional  notes  at  .'25  cents 
each.  $7<!.'J..j3«)  : 


Hi 


$1    ^l^.-Sp^.S^f) 

2  <>,i;i7,i.'8<) 

4  ns.uf) 

5   .I.TO.^.'.'.'i'J 

.'50    1  5. .'{()() 

H)() 7/200 

■"'(>()    .  2,07  i.OdO 

i.<»(i()  5,sn,ooo 

.'500  IrfT.iM'  lult  r  iiotrs   fnr  li.iiiks .'fHri.OOO 

1.000  lcjr,il-t(  lulcr  nods    fur  Ivitiks '2,08i,l)()l) 

5,000  lrgal-t(  ndiT   i\oUs   for  limits 7.5,7  ^.5,000 

It    will   f)e  recalled    that  upon    the    lirst    !i<;}(),(M)().(M)() 
issued  the  g(>\(rnin(rit   is  ohligcd  ti)  rnaititain  a  2.")  |)cr 

_ I    _       _ :       ,,_,        i'    !,!    ,,_,,!     „!i:  _, , i      .  ! 

i-'i-iii    It  .Svr\'t"    liiiitie    'ip    i-i     giHii    <iri(i    St'i'i  i  i  il  i(~S    gi  in  1  ilTlTl  (  »' i 

by  the  United  Kingdom;  hut  at  least  15  [kv  cent  must 

48% 


THE    BANKS   AND    illl.   (i()\  KKNMKNT 


4S[3 


lie  ill  «T)1(1.  As  a  iiiattir  of  fact,  the  governineiit  iiiaiii- 
..Mis  tlic  whole  of  this  reserve,  .$7. •>()(). ()()().  in  o()l(l. 
Notes  ;ih()ve  «.'J().()()().()()()  are  issued  only  on  a  ^old  hasis. 
The  specie  held  on  Ai)ril  .'}(),  i;n;3,  to  fnlHU  this  ohliga- 
tion  anionnted  to  .$«;j,74(),7.'j:j.  It  will  he  seen,  there- 
fore, that  the  Dominion  notes  are,  in  reality,  gold  cer- 
tificates. The  act  is  jjlainly  inodell'd  upon  Peel's  Act 
(if  1814,  which  perniitted  the  Haiik  of  En-^'land  to  issue 
notes  up  to  a  certain  amount  on  securities,  and  heyond 
that  ])ound  foi-  jxiund  on  uold. 

The  hanks  are  ri(|uire(l  hy  the  government,  under  the 
Urms  of  their  chart  rs.  to  kiep  4()  ])er  cent  of  such  re- 
serves as  they  determine  to  hold,  in  Dominion  notes. 
'I'he  hanks  i)uy  these  Dominion  notes  with  gold.  From 
the  goverinnent  statement  it  may  he  seen  that  on  April 
.'{(),  im;}.  the  hanks  held  ahout  .S7S.()()().()()()  in  large  legal- 
!i  ikUi-  notes,  which  are  used  in  jiai't  U^^  reserves  and  in 
p.irt  for  cl(;ning-house  purposes.  Ai..  .',  >< I. "),()()().()()() 
of  the  rest  of  the  Dominion  notes  i-  used  hy  the  hanks 
as  till  money,  Iea\  ing  oidy  .S-J(),()()(),0(K)  in  the  hands  of 
tlie  pe()j)le. 

As  has  Ikcu  shown,  against  uie  paper  moncv  of  the 
Dominion  the  vaults  at  Ottawa  contain  somewhat  more 
than  $!»1.(M)(».(K)()  in  gold.  Many  linancial  critics  have 
iiiiiintaincd  that  this  is  an  excessive  reserve,  and  an  utter 
\\;istc  of  a  great  amount  of  capital  that  oug'it  to  he  out 

the  world  doing  husincss.      It  is  said  that   conditions 

II  n(  \(r  ai-isc  in  Canada,  sjiort  of  its  con(|ucst  hy  a 
i.ireign  foe,  in  whicii  government  notes  to  the  extent 
nf  over  SI(M>,()(M»,(M)0  vvouhl  l)c  presented  at  the  receiver- 
U(  neral's  oMicc  with  a  demand  for  gold.     The  critics  of 

■  :,v   pit"".;  I'il    j;;:iii  y    ili.'i  liitiiiii    liiiir   iiii     iiSt  V\i     i.,u  K    ui    iiic 

Dominion  notes  might  he  placed  at  .50  per  cent  of  the 
i^-sue,  instead  uf  practically  dollar  fur  dollaj-   in  gold. 


Ill 
1.1 


m 

J 

i 

<3 

i 

Jl 

la 

484 


MONEY   AND   RANKING 


This  would  reduce  the  amount  of  idle  /'old  l)y  $-il, ()()().- 
000,  uiulei'  present  fotulitions.  It'  the  \a\v  recjuirin^  the 
banks  to  keep  M)  eeiit  of  their  reserves  in  that  case 
remained  as  it  is,  ihe  gold  lield  against  tiie  large  legal 
tenders  in  possession  of  the  bunks  would  l)e  redneed  fiom 
$7H.()()0,0()()  to  .^.*{9.()()0,00(;.  The  further  suggestion  is 
that  the  ."^.'{D.OOO.OOO  in  gold  ^hould  he  used  to  reduce 
the  national  debt  or  s])ent  by  the  government  on  na- 
tional works.  In  this  way  the  national  ))urse  would  gain 
j;t  least  i^l  .'JoO.OOO  a  year  in  interest,  and  the  banks 
A\()uld  still  be  amply  secured  against  any  eoneeivable 
(!<  maud  foi'  gold. 

Xow,  the  chai-tered  baidxs  held  on  May  '.M.  101.*),  in 
round  numbers,  .S-1.(),()()0.00()  in  spirie  and  $J):},0<)(),()()0 
in  Dominion  notes.  If  they  held  inci'ely  !■(>  \)vr  ci-nt  of 
their  cash  reseini's  in  Dominion  notes,  it  would  amount 
to  .$.5;},0(»0.(I0()  only.  As  a  matter  of  fact,  however, 
they  keep  siune  SK». 000.000  of  Dominion  notes  in  tin  ii- 
reser\es  more  than  the  law  re(|m'res.  'I'his  they  do  be- 
cause of  the  ease  with  wliicb  legal  tend<'rs  can  be  .sent 
to  the  dill'  I'eiit  bi'anch  b;inks  foi-  use  in  their  reserves. 
That  tluy  would  contimie  tn  d'>  so  i!'  the  law  were 
changed  in  the  maimer  descrilxd  is  more  than  doubtfuL 
If  Ihey  reduced  theii'  holdings  of  legal  tenders  to  the 
amount  that  the  law  prescribes,  that  is,  to  !t^.")."{.000.- 
000.  the  government  would  gain  in  intei'cst  only  on  ;iii 
i.s.sue  of  about  •'^•JT. 000. 000.  ;ts  far  as  the  large  legal  ten- 
ders ai-e  eonc(  rued.  That  would  be  a  paltry  gain  in 
icinrn  for  tluenh  ninn  the  gold  reserves  of  Ibis  eoimlry. 
already  tno  srn;dl.      .\nd  despite  what  has  been  said   by 

those  in  f;i\  or  of  the  plan,  the  n(  w  order  of  things  would 
I         i.i«^       ..  .  ....     — 

MOl   HiUKt.    iiii     i/Oniiiiiuii    iioits      ;in    ^^(loii   ;|s    i4oi(i.  f\  1 1 

doubt  in  normal  times  llu  \  would  continue  to  ciriulati' 
at  ])ar.  as  long  as  tlity  were  payable  on  demand  in  gold. 


TIIK    HANKS    AM)   Till"    (iON  l.HNMr.N'l" 


1^ 


and  as  1imi,!4  as  tlit   jjeopk'  deinaiKkd  lliciii  as  a  im-diuiii 
1)1'  (.-xchangt*  and   Hie  hunks  conliniK-d   to   use   theni   in   • 
tlnii-  ivsLTves.     Hut  if  the  <i,o\  criimmt  sci/ed  the  oppor- 
iiitiity  to  make  further  jjrofits  l»y  extending-  the  issue  of 
I  he  sniaUer  cK-noniinations.  the  time  rnij^iit  easily  come 
whiii  a  iiation-\vi(k'  (hsaster  would  depress  their  value. 
Aside   from  the  (|uestion   as   to   whether   the  govern- 
ment should  eompete  with  the  hanks  in  issuin;^'  a  credit 
iiiireney  to  the  people,  there  is  the  serious  prohiem  of 
niaintainiii<i;  an  a(le(|uate  '^nld   reseI■^•e  'u  the  eountrs. 
The  pro\  ision  of  the  law  eompelliu^-  the  hanks  to  keip 
to  per  eeiit  of  their  reserves  in  <^()vernment  notes  was 
enaeted  at  a   time   when  the  Dominion   needed   money, 
and  souuiit  to  find  room  for  the  eireidaticn  of  iis  notes. 
i"he  hanks  would   strenuously  ohjeet   to  eh;mo-ino-   the 
essential  eharaeter  of  the  notes  at  the  i)resent  time;  and 
would  prefer  to  keep  thc'ir  ow  n  j^old  rather  than  have  the 
4(»\trnment  deplete  its  j^old  reserves.      It   may  t  ven  he 
.|uestioned  whether  there  is  suHieieiil  ^old  in  the  eoun- 
li\-   for  the  husiness  done.      The  total   lial)ilities  of  the 
•ji  ehartered  hanks  on  May  li\,  I'.M.'k  were  J<1.--'77,'.>41,- 
.V.>7.     .\f^a!nst  this  the  haidss  held  in  k^j^al-tender  money 
■^  I ;{.■{, l.'}.*)..'}!"-*.      This    sum    was   eomposi'd   of    nol,!    and 
1(  oal  tender  notes      piaetieaily  «^'o!d.     Now.  if  the  u'ov- 
ernment  should  hold  in  ^old   a    reserve  of  only   .")()   per 
(■ml  a^-ainst  these  notes,  it   is  plain  that   the  position  of 
llie  haidxs.  as  well  as  of  lh<'  eountr\ .  would  l)e  wi'aki'iied. 
I  )niiiinion  notes  arcworthless  for  intrrnational  exehan^e. 
althouiih   they  are  a   full   le^ai  tender   in   (  ;ma<la.     It 
would    seriously    weaken    Canada's    inlernatittnal    posi- 
tion  if  her  present    sm.-dl  stoek  of  ^old   were  seriously 
'i!:ninisln(l.     It  is  (juite  eoneeivahle  that  in  certain  peri- 
ods  foreif^n   inxcstments   in    Canada    will    fail   off:    and 
Canadian  seeurities  might  he  sold  in  large  (plant  it  us  hy 


.-}? 


ISO 


MOxNKV   AM)    IJANKIXG 


K       ■: 


iorc'i^ii  holders.  Tliis.  addi'd  to  heavy  imports,  vrould 
seriously  allVet  the  rale  of  exchange:  and  a  small  stoek 
of  gold  would  not  re<4ulate  thi'  situation.  It  is  jjerfeetiv 
clear,  therefore,  that  the  ,^•overnnlen^  would  he  ill-advised 
to  threaten  the  supply  of  oold  l,y  e.\iK'rimentin<^-  with 
the  Dominion  note  issues. 

.")44.  Td.vini:;  llu  Jxaih's. — Some  Canadians  have  eom- 
])lain(d  that  the  hanks  are  given  special  favors  hv  the 
government,  for  which  they  |)ay  nothing  hy  way  of  uix- 
ation  to  th  country.  One  man.  for  example,  who 
appeared  hefore  the  C'ouimittee  on  Haid<ing  and  C'om- 
meree  in  April.  1;>1.'{.  said:  "'rhe  hanks  have  been  given 
a  monopoly  oi'  the  haidsing  husines-  of  the  country.  In 
addition  they  aiv  j)ermitti(l  to  issue  currene\  to  the 
extent  of  their  paid-up  capital  at  no  greater  cost  than 
that  of  the  engraving  and  ])rinting.  This  amounts  to  a 
virtual  gift  from  the  government  of  ^100. ()()().()()().  'I'his 
currency  is  not  suhject  to  a  tax  of  any  kind,  and  instead 
of  iieitig  secured  hy  gold  nr  goxernnicnt  bonds  il^  is  se- 
cured hy  heing  made  the  preferred  creditor  against  tlu' 
assets  of  the  })ank.""  This  statenuiil  is  txpical  of  many 
similar  criticisms.  It  is  hardly  neees^^ary  to  draw  atten- 
tion to  the  fallacy  that  tin-  government  conlrihutes  -SlOO,- 
OOO.OOO  to  the  hanks,  hy  permitting  them  to  increase 
their  lialiihties  to  that  amount,  lint  the  (luestioti  of  tax- 
ation, which  comes  up  again  and  again  in  (':!nada.  de- 
serves some  considci'ation. 

It  is  true  that  the  lederal  goNcrnment  dot's  not  tax 
the  hanks:  iml  llicy  paid  in  the  se\ti-al  provinces  in 
li»]'_'  ahiMit  .SnT.ii'H)  h\  \Ka\  of  taxation.  This  takes 
no  account  of  local  ta\(s  on  red  tstatc  and  special 
licenses  and  fees  in  certain  citiis.  I"or  (  \ample.  Halifax 
charges  each  l>ank  $1.(100  yearly  and  I  If.  of  1  |)er  cent 
U[)on  i!i<'  axerage  \iilimie  of  husincs>  done  .  including  ;dl 


4-'  r 


THE   BANKS   AND  TIIK   GOVERNMENT 


487 


loans  or  investments  and  current  and  savin(?s  deposits. 
The  niininiuni  so  jiayable  is  $7.'}();  but  a  bank  may  eom- 
nuite  for  its  I'ees  and  taxes  by  paying  $;J.()()0  yearly.     In 
St.  John.  X.  IJ.,  a  munieipal  tax  of  1/12  of  1  i)er  cent 
is  imposed  upon  the  average  vohime  of  business  done. 
as  in  Ilahfax,  X.  S.     In  .Montreal  a  s])eeial  license  of 
S(i()()  is  exacted  from  each  head  oflice  and  if^lOO   from 
each  branch.     In  Quebec  C'i^v  the  mumcipal  license  is 
SI, ()()()  with  $2()()  for  each  branch.     Montreal  also  im- 
poses a  tax  of  7'  2  ])er  cent  on  the  rental  value  of  the 
hank  premises,  aiid  Quebec  a  similar  tax  of  fJl-  per 
(■(lit.    These  taxes  are  in  addition  to  the  real-estate  taxes. 
Ill  Ontario  the  law  ])rovides  that  banks  shall  be  assessed 
lor  a  sum  etjual  to  7-)  i)er  cent  of  the  assessed  value  of 
the  real  estate  occupied.     On  this  sum  the  local  rate  of 
taxation  is  levied.     This  is.  of  course,  in  addition  to  the 
local  tax  on  real  estate.     This  tax  does  not  amount  to 
as  much  as  might  appear;  for  the  assessment  of  real 
(State  in  Ontario  municipalities  is  much  below  the  mar- 
ket value.    The  banks  in  Toronto,  therefore,  do  not  i)ay 
nearly  as  heavy  a  tax  for  local  purposes  as  those  in 
Montreal. 

Talking  the  i)oi)ulation  as  given  in  the  1011  census,  the 
number  of  inhabitants  i)er  bank  for  these  five  cities  is  as 
i'ollows: 


'  fi 


I'opul.ition 

Toronto    .'i7(i.'2K) 

Montreal    l()(l,l!)7 

(^i.'Ih'c TH.'XiT 

Halifax   «■(;.(;()  1 

.St.   John    i'.'.i!);) 


NmiilitT  (if  I'tr- 

Bank  Offices  suns  to  15  ink 

U.-i  2,.)!>t 

!)7  4,806 

'.H\  .'<,()() -2 

!',>  3,88-2 

IH  2,656 


Tt 


IS  ;tvo 


!)•  Die  that  the  lieaiv  taxc 


in  ^Montreal  have 


ha<l  somethi  ig 


to  do  in  bringing  about  this  result.     It  is 


488 


MO\i:v   AM)   HANKING 


L  «    . 


char  thai  when  a  miiiiicipahty  levies  heavy  taxes  it  is  not 
l)r<)\  ided  with  the  same  haiikiiin-  faeihties  whieh  it  other- 
wise would  .secure.  The  hanks  naturally,  whenever  jjos- 
sihle.  transfer  tliese  taxes  to  horrowers,  especially  upon 
customers  not  of  the  first  class.  In  some  form  or  other 
they  endeavor  to  earn  these  ta  vcs;  and  it  is  only  fair 
to  j)ut  these  on  the  locality  where  they  are  levied." 

The  proj)osal  which  lias  found  most  favor  in  the  tax- 
ation of  the  chartered  hanks  i)y  the  federal  government, 
is  to  levy  a  tax  on  circulation.     At  one  time  the  hanks 
did  j)ay  a  tax  on  circulation;  hut  in  1870.  when  the  aov- 
ernment  restricted  their  note  issues  to  $.5  and  multiples 
thereof,  to  make  room  for  Dominion  le<)'al  tenders,  the 
tax  was  repealed.     It  was  felt  that  in  a  new  and  unde- 
veloped coimlry.  such  as  Canada,  the  hanks  sliouhl  not 
he  hurdened  in  furnishiiio'  accommodation  to  the  ))eople 
hy  a  tax  on  note  issues,  since  in  tiie  country  districts 
notes  fiii'in  the  principal  medium  of  exchan<4'e.      That 
reason  holds  ,o(),),l  to-day.    .\ny  considerai)le  tax  on  cir- 
('ulation.  as  has  already  heen   pointed  out,   would  un- 
douhtedly  ohlioe  the  hanks  to  close  their  hranches  in 
the  small  country  districts,  especially  in  the  AVest.     It 
is  scarcely  realized  to  Avhat  extent  the  hanks  have  pro- 
vided hanking-  accommodation  to  the  towns  and  villages 
of  the  West.     This  is  seen  hy  a  glance  at  the  following 
tahles,  which  show  the  numher  of  hanks   in  the  cities, 
towns  and  villages  in  the  four  western  provinces — Mani- 
toha.    Saskatchewan.    i\ll)erta    and    liritish    Columhia. 
(In  this  c'omiection  it  should  he  noted  that  IJritish  C"o- 
lumhia's   jjopulalion   i^  all  contained   in   the  cities  and 
large  electoral  districts.) 


it-. 


Tin:    IJANKS   AND   '11  li-   C.OXKUNMENT 


489 


I 


'r()\  met' 


No.  of 

Citits 

Allurt;i    <i 

ISritisli   (  ()liiiiil)i;i    ....  I'l 

M  iiiitob.i t 

2      S  i''k;\tclic\v.iii    1 


li.WK  oil  i(  I..-;   i\    11 11.   (  nil  s 


;;!) 


H.iiik 

l'ii{iiil'it  ion 

Popiilitioii 

Oll'u'cs 

to  Hank 

!)().'2.")'i 

(il 

l.!Si» 

',>();i.()81. 

1  I'J 

l.l:it 

lO.S.'il!) 

().") 

'J.jl  1 

C^.',•29^ 

t-j 

l.lS.'i 

■-lii.tT!) 

.-no 

l.liTtl 

BANK    OFFTCE.S    IX    I  N( OHPORATKD    TOWNS 


i'ro\  iiu'O 

Mli.rt.'i    

Nl.niitoha   . .  .  . 
."^  isk.iti'liewan 


Xo.  of  Hink  l'o])iilitioii 

Towns  l'o|iulition  OHiecs  to  Hank 

'27               'J,-).S,S1  r>r)  \-~\ 

■2t              'i().!)'2G  47  r,i:i 

51)                .'57..")01  97  '587 


<)<).;!  I  1 


!!»!» 


1,V1. 


15ANK   OIFICKS    IN    INt  OUPORATKl)    VIM  ACiKS 


No.  of 
Trovince  Villafri  s 

Allurta    8-2 

Manitob.a    '21 

."^  iskatc'liewaii   ....         1!);' 


I'o])ulation 

2(5,779 

10,190 
;5l.,")9() 


298 


6a, .')().' 


Bank 
Ortic.-s 

70 

20 

l.-.l 

'2  11 


Po))nlation 

to  Hank 

.'iS.'i 

509 

209 


28i 


Tlicse  fipfures  sliow  tliat  a  tax  on  note  ciirulatioii 
vvdiild  foiTi'  the  banks  to  do.se  many  of  tlu'lr  olFicos  in 
ll:c  ^Vest.  While,  no  doubt,  tlie  ])anks  have  a  valuable 
iianeliise  in  tlie  power  to  issue  notes,  tliey  a|)])ear  to 
be  giving'  a  suttieient  return  in  serviee.  Xo  other  l)ank- 
iiio-  system  in  the  world  ean  show  a  better  record  in 
briniriiijr  banking-  faeilitie.s  close  to  the  people,  especially 

'     .       il-  „        i. ]  '.    I  ..!  ^.t  ..  \         fii-v-       i\i\       /■!  l*r  •!  l1 ')  f  w  U  I        H'Mlll/l 

J  i  i     i  I  iv."     Vwl  •  I  i  I  ;  '»      ; ; :  ~  ;  :  ;^  "^  ~; .         -  -      ■--.--     •  -: ! 

result  merely  in   im])airinj2:  the  s<'rviee  ol'  the  banks  to 
!lie  people:  ;uid  in  the  last  analysis  it  would  be  j)Mssed  on. 


490 


MONKV    AM)    NANKING 


fe 


ill  })art  at  least,  to  the  eustoniers  ol"  the  I)aiiks.  Vvn- 
posals  to  tax  the  eii-eiihitioii  of  the  hanks,  therefore,  are 
ill-timed.  W'liat  is  wanted  is  not  only  inoix-  hank 
offices  as  the  eonnti'v  <^i'o\vs,  hnt  more  money  a\ailahle 
for  loans  in  the  West.  .More  eapital  is  needed  for  C'a- 
nadian  hanks;  and  that  is  not  likely  to  he  seenred  if  it 
is  tliou<.>ht  that  the  i4r)\crnment  intends  to  restrict  hank- 
ing- o])erations  thronf^hout  the  country. 

.54.>.  Mont/il//  stdtfuicnts  to  ilic  i<;()vcnimcnt. — Under 
the  act  chartered  l)aid<s  are  ohli^^cd  to  make  a  monthly 
statement  of  their  assets  and  liahilities  to  the  govern- 
ment. In  tlic  revision  of  1  !>!.'}  the  schedule  was  modi- 
tied  somewhat.  {)ro\  iding  foi'  a  moi'e  detailed  statement 
of  a  hank's  affairs.  A  well-known  '  .k  manager  has 
expres.sed  the  o])inion  that  these  returns  "are  not  \vorth 
the  paper  they  ai'c  written  oit":  the  reason  hcing  tliat 
fi'audulent  i-eturns  from  !)anks  that  ha\e  gone  into 
li(luidation  have  heen  included  in  the  general  statement. 
AN'hile  it  is  true  that  statements  hy  such  defunct  insti- 
tutions as  the  Ontario  Hank,  the  Sovereign  Hank,  and 
the  Farmers'  Hank  have  heen  necessarily  included,  and 
have  thus  vitiated  the  results  I'oi-  the  ])uri)oses  of  com- 
parison, it  yet  remains  true  that,  on  the  whole,  the  state- 
ments have  heen  honestly  made.  At  any  rate,  they 
furnish  the  only  figures,  concerning  the  condition  oi'  the 
banks,  available  to  the  ])uhlic. 

It  is  not  neces.sary  to  make  a  detailed  analysis  of  th'' 
resources  and  liabilities  of  the  chartered  banks;  but  the 
chief  items  which  bear  upon  the  standing  of  the  banks 
may  be  briefly  set  fV.rth.  In  order  to  make  clearer  the 
growth  of  the  banking  ])ower  of  Canada,  a  comi)arisoii 

1907 — a  memorable  year  in  Canada  as  well  as  in  the 
United  States—  and  their  jjosition  in  recent  years. 


rili:    BANKS   AM)   Tin:   (iOVKRN.MF.N'l' 


M)l 


I'ii'st.  tlif  extent  of  the  loans  and  deposits  and  their 
n  lation  to  one  another  may  l)e  eonsidered.  ""Current 
Iduns  in  Canachi""  rei)re.sent  the  money  loaned  within 
theeounlry  for  eommereial  pin'poses,  and  do  not  inehide 
the  i-all  loans  whieli  are  hased  on  stoeks  and  lionds.  'I'iie 
il(  posits  inelude  tin  dejjosits  in  Canada  (-  y.  and  eon- 
sist  of  those  payahle  on  demand  as  well  as  those  pay- 
;i!ile  al'ter  a  fixed  date.  The  sum  total  of  these  i'et".rns 
at  certain  speeitied  times  was  as  follows: 


C'lirniit  l.o.iiis  l)t  posits 

May  .'31.    liH.I $8!)H,II."<S.(H)0  $99  K!)  1  "'.DUO 

l).("tnib<r    .'il.    191'^.       881  ..'!.il  .001)  1 .01 'J,  H  8,000 

Jiii'f  ;!().  I9l'j ,si-s.9K).oo()  i.ooi-.siT.noo 

June  ,')(),   1907 ;")8(),!);i0.000  .TSj),  I- jO.OOO 


Ratio 

90% 

877o 
8  1-% 


This  statement  illustrates  the  remarkahle  (growth  of 
Canadian  hanking  in  reeent  years.  It  indicates,  too. 
that  the  hanks  are  not  so  heavily  committed  in  the  way 
of  loans  as  they  were  in  li)()7.  Perhai)s  it  would  he  fair 
to  say  that  the  hanks  lia\e  heen  more  careful  and  con- 
s(r\  ative  in  making  their  loans,  excluding  as  far  as  j)os- 
sihle  those  of  a  speculative  nature. 

A  better  survey,  liowever,  of  the  recent  position  of 
the  hanks  may  be  obtained  by  finding  the  ratio  which  the 
assets  that  may  be  (juickly  reali/.ed  upon  l)ear  to  cur- 
it'iit  liabilities.  Cash  resources  consist  of  specie  and 
Dominion  notes.  For  ])urpose.s  of  comparison  the  cash 
reserves  of  the  banks  on  certain  selected  dates  may  i)e 
shown  as  follows: 


1  )(iiMini/in 

\(?tcs    . 
Total    . 


.May.  191  ;i   Die.  191-2   June,  1 91 'i   .June.  I907 
.tK),;?'2.').()7f)  $.S.5.780.3fJ.S  ^:i7.\'-2-2.76r)   $'2i,H)I.()(l,S 

9;5.io9.(),'i()   !)i-..'J8i.i8i-   !);i,()i.s.o.'i9  t:..5j  t.i8-2 


$13.S,i35,81'2  .$1.'50..S()1.,817  $130.170,80i  .t()9.(i.').'i,78r) 


'at;-  '- 


492 


MONF.V    AND    HANKIXG 


In  tlic  six  years  siiifc  11»()7.  it  will  be  uutcd  that  tin- 
cash  reserves  have  almost  dtxihkd. 

Another  inipoftant  item  in  the  lianks'  (juiek  assets  is 
the  excess  of  halanees  <lue  to  hanks  from  as^eneies  or 
othei-  hanks  ontside  of  Canada  above  tlie  amounts  due  to 
outside  a^a-neies  or  other  hanks.  Tliese  amounts  (000 
omitted)  aiv: 


May.  'l.-i 
Balances    due     fr<ini 

L'liiti'd  Kiii^dciiii. .  ."fjl  ,S.'{5 
lialaiiiTs     dill'     from 

(■Iscwliirr 27,8'2G 

Total   $J.9,66l 

B.ilaiiCfs  due  I'liilt'd 

Kingdom ■fP.^O,") 

BalaiK'ts     due     tlsc- 

wliere 9-<)7.'5 

Total $18,880 

Excess  balance   ....  ^0.781 


D.e.,   l-,' 

June,   12 

June,  'U7 

$1(1.1  1!) 

$28.0()i 

$10..'!00 

2.'5.t.'ij 

31,887 

1  ..771 

l-'^a.-^jl. 

$62,891 

.$25,071 

$S.,'!I-2 

$6,129 

$12,210 

7.082 

7.5f)7 

5,891 

$15..'?9t 

$l.'?.99(i 

$18,101 

18.1()0 

i8,895 

6,970 

Canachan  hanks,  as  lias  l)een  explained,  maintain  at 
all  times  lar<)e  amounts  abroad  at  eall.  largely  in  New 
York.  On  May  .'Jl,  191.'},  this  amount  .somewhat  ex- 
ceeded Sixi.ooo.OOO.  These  loans  are  (juick  assets,  and 
ai'e  available  in  Canada  when  needed.  Call  loans  on 
Canadian  stocks  and  bonds,  as  already  explained,  can 
hardly  be  included  in  tlie  category  of  assets  that  may 
be  (juickly  realized  upon,  except  in  normal  times  when 
they  are  considered  with  more  justice  as  call  loans.  In 
])eriods  of  stress,  however,  call  loans  on  Canadian  secu- 
rities are  regarded  bv  the  banks  rather  as  fixed  loans. 


'VU(,      Ilov,].'     i^f     A[.'t!ltv.-.il     li'!-; 


,;i    1, 


r\.. ..,,!.. 


whatever.     So-eallcfl  call   loans  in   Canada  ^v•ere  fairly 
steady  in  101.*]  around  -'i^TO.OOO.OOO. 


THE   BANKS   AM)   THK   (lOVKUNMENT         M».'{ 


Along'  with  the  foreign  call  loans  should  he  c-()n>i(lcir(l 
current  loans  mIji-ojuI.  These  latter  are  distrihuted 
through  the  I  .lited  States.  Mexico.  C'uha,  the  ^Vest 
ludies  and  elsewhere.  On  the  liahilities  side  must  he 
considered  the  deposits  received  hy  Caiiadian  hanks 
ahroad.  These  several  accounts  ahroad  conipaic  as  fol- 
lows : 


M,iv,  191  ."^ 

D.ccmkT,   lpl'2 
.hiiH".   1<)1'2    .  .  .  . 
.lunc,   iy07    


C1II  Loans 
.$96.1 -.1, '20!) 

10,5,0.52.101 

l'i0.5()9.812 

55/298,873 


Currrnl  Loans 

$3  7. 6<)  1.7  8(5 

i0.n90,!'2() 

.'U.'251,()58 

'2;5,;i88,,'2.59 


Deposits 

?:97.9;i,"),'21(i 
87,050.132 
82.0()7.093 
59.17<).'iO(j 


It  will  be  seen  from  this  statement  that  the  funds  for 
current  loans  abroad  are  jirovided  from  deposits  re- 
ceived abroad.  On  ^Fay  .31,  lOl.'J,  dei)osits  received  by 
Canadian  banks  abroad  exceeded  by  .^C.O.OOO.OOO  the  cur- 
rent loans  ahroad.  As  the  foreign  call  loans  aggregated 
over  $9(),()00.0()0.  it  is  manifest  that  some  !^;j().()()().()()() 
of  the  amount  loaned  abroad  on  call  is  Canadian  funds. 
But.  as  has  been  explained,  these  call  loans  form  ii 
secondary  line  of  reserves  for  Canadian  banks. 

A  fourth  item  in  the  list  of  assets,  which  may  be 
quickly  realized  upon,  is  the  holdings  of  railway  and 
other  bonds  and  stocks.  In  so  far  as  these  are  held 
abroad,  they  may  rightly  be  considered  a  cpiic-k  asset, 
although  when  held  in  Canada  their  right  to  he  consid- 
ered as  such  may  be  open  to  ({uestion.  The  holdings  of 
Canadian  municipal  .securities  can  hai dly  be  regarded  as 
quick  assets,  under  certain  conditions,  as  in  1913. 

Coming  to  current  liabilities  of  the  banks,  it  is  fournl 
that  they  consist  of  three  items;  namely,  circulation,  de- 
nosiiS  and  hal'incos  du.f-  povcrnmcnts.  The  latter  are 
divided  into  accounts  due  to  the  federal  and  provincial 
governments,  respectively.     Deposits  consist  of  those 


494  MONKV    AM)   BANKIMJ 

payable  on  dcnuin;!  -L'posits  j).'iyal)le  after  notice  on  a 
fixed  (lay,  and  deposits  received  elsewhere  than  in  Can- 
ada. These  various  items  for  the  dates  considered  were 
as  follows  (000  omitted)  : 

Drposits  May. 'l.'i  I)(t.,'I,>  June, '12  Jtinr,  •(): 

Oil  (irniaiid  ..  .  .  !f.S()  k  1 ,-.!)  $.(7!). 777  .*:i7;!..')00  $170,012 

<'"  '|'»ti'''  ();i().7:.,-,  ():i-j.(in  ().'!1..{17  4.0,H7 

'^'"■"■hI    J)7.!).i.")  S7.n.-,n  S'2.0(i7  59,171} 

'•'"'■'J    .$1,01)2,81!)       .$I,0yf),t()8       *1,08().88 ).  ,t6l8,(i.-f.-, 

Amonpr  the  assets  of  the  Canadian  haidvs  is  carried 
an  item  made  up  of  "notes  of  and  checks  on  other 
hanks."  which  is  merely  an  inter-hank  item  On  tnis 
account  it  may  he  deducted  from  the  current  liahilities 
of  the  i)ard<s  as  a  whole.  The  relation  of  current  assets 
to  liahilities  may  then  he  compared  as  follows  (000 
omitted)  ; 

Qn!</,- .t.ssrl.<!  ray. 'l:{  n.T..':2  ,Iunr.  M:  Jnn.. '07 

(  a^^l:   r.s.. lines    .$1  .'<.'{,  t.1.-.  ,<  1  JS..;!)  |.  .i^l.iO.lTO  ,'f(i<).«i.-,.-, 

I'accss    for.  i^r,|   halaiicf.  .•i(1.7H0  17.'-!(il  H).7!):!  (I.'CO 

(    il!    loans    aliroail  .     .     .  <)(),  I  "i  1  m.KJCrJ  120. .")()•)  .'>.'),2!>8 

Railway  bonds  vV  stoiks  (17.021  ()8,8K»  ()2,2!)2  H.-SSI 

'■'"••'•    if!.'i27..''S7     •*.{20.  n  7     .t;?()2,H2  !■      ^'I  7.'f,;io  \. 

Ciirrnif  f.iiihllitirs:     May.  ||l|.l       D.r.,  |<)|J      .luiif.  I!H2      .Iiitic,  'o7 

<  iri'iil-itiori    •■T'n)2.!l|)7  .*ll(i,(US         .-^^102.011         .*7:i.:i  1 1) 

'*'l"'^i'^    I.O!)2.8,-)0         1.0!)<j,Ki8         1.08(i.H8|.        (il-S.fi;i(i 

J{ai  inrr     iliii      ■^(i\  - 

"■""""t^  .•<!),7.'50  .'JD.rtl'i  .S7.288  l.-J.fjH 

'l""t'>l    .i'l,aH5..5;)7     $I.2I!).IJ,S     ■*l.22(i.l8.i     •+7.if).787 

Less  iiolcs  of  and 
rlirrl<s  nti  otiicp 
'""'^•^  6l,.'SRfi  81.68^  ,'57.7,5,'?  Q()'\[G 

'lot  il  .*l.l7i.2ll     ij«!.lfJ7.iU     >l.l(;s.^.■^o     $710,271 

itilin   (  [irr  (imI  ) .  27.8  27. !•  ;<1.0  2 1 .  ."J 


Tin:    HANKS   AM)   THK   r.OVKHNMFAT 


v.)r, 


h 
ill 


'riifsc  statements  cover  the  eliief  returns  of  the  hanks. 
,111(1  showtliat  tliev  have  steadily  improved  their  |)osition 
ii!  reeent  years,  although  their  husiness  has  greatly  ex- 
])anded. 

:U6.  Government  jiostal  and  i^nrina^fi  hnnJxS.-- The 
un\  ernment  comes  into  direct  e()mi)etition  with  the  char- 
ti  red  hanks  through  the  ])ostal  and  government  savings 
anks.     The  jiostal  hanks  were  estal)lished  in  18(')7,  al- 

oiigh  they  did  not  hegin  oj)crati()ns  until  i\])ril,  ISfJH. 
There  is  also  a  system  of  savings  hanks  under  the  eon- 
tiol  of  the  minister  of  finance.  Prior  to  C'oid'ederation, 
■A  svstem  of  savings  hanks  was  in  existence  in  the  mari- 
time provinces,  under  the  control  of  the  ])rovincial  gov- 
( itiments.  These  hanks  wei-e  taken  o\er  hy  the  Domin- 
ion in  1H()7;  hut  the  system  is  gradually  heing  ahsorhed 
hy  the  postal  savings  haid<s. 

rntil  IHD'J  the  amount  deposited  l)v  one  person  in  one 
year  was  limited  to  $.'}()()  and  the  total  deposit  could  not 
exceed  $1,000;  hut  in  180'J  these  amounts  were  changed 
to  $1,000  and  $;j.000  rcsi)eetivcly.  The  average  deposit 
is  hetween  $200  and  $.'{()0.  which  indicates  a  patronage 
hy  others  than  those  l)i'longing  to  the  working-cIas>. 
In  (ireat  Britain  the  average  deposit  in  the  postal  sav- 
ings hanks  is  $7.^,  and  in  Helgium  ahout  $<>.!. 

It  was  originally  provided  that  the  deposits  should  he 
in\csted  in  Dominion  securities,  hut  in  1H7.")  this  law  was 
I  (pealed.  The  deposits  are  now  handed  over  to  the 
i( ceix  er-geiieral  to  he  used  hy  him  on  currctit  account. 
W'ifhdrawiils  are  paid  hy  him.  'I'his  creates  a  floating 
iiidchtedness  of  ahout  $.")7.000.000.  payahle  on  demand. 
I-'or  more  than  twtnlv  yeais  the  rate  of  interest  was 
I  p<,  I   cent,  hut  it  was  reduced  in   IHHO  to  .'J'  '._>  per  cent, 

'^^iM     in      i  oW  I      TO    ii     p*  '      i"i"iit.     '»»ii("ii'     ii      ri»''."»     SitifWi^.  i  TiiJ 

I  hart  ml  hanks  ha\f  had  to  fnllow  dose'y  the  late  pai<l 


ail 


:to 


m 


H! 


4 


49(i  .AIONKV  AND   BANKING 

ill  the  postal  saving.s  banks,  and  this  has  led  to  much 
criticism  of  the  n()vernnu  iit's  ])olicy  Indeed,  it  is  about 
the  only  complaint  made  by  tiie  hanks  as  a  whole.  The 
receiver-jifeneral  maintains  a  reserve  of  10  jier  cent  of 
the  total  deposits  in  j^'old ;  and  a  balance  of  about  $o()0.- 
()()()  w  ith  the  chartered  banks  to  meet  withdrawals,  these 
being  paid  by  check  on  the  banks. 

As  has  been  said,  the  chartered  banks  object  to  the 
comj)etiti()n  of  the  postal  baid<s  maiidy  upon  the  ground 
that  the  ii  ])er  cent  interest  rate  on  deposits  is  exces- 
sive: and  that  thev  are  foi-ced  by  the  action  of  the  aov- 
crnment  to  niaintain  the  same  rates.  They  |)oint  out. 
further,  that  this  money  costs  the  govenunent  a  good 
deal  niiii-c  tha?i  .'{  j)rr  c(  tit.  wjien  the  ex{)enses  of  man- 
agement are  also  considered.  Although  a  considerable 
sum  is  placed  at  the  disposal  of  flii'  govermiient  by  the 
depositois.  that  money  must  be  always  subject  to  pay- 
ment j)ractl("dly  on  demand.  The  bankers  argue  thit 
the  government  could  secure  the  same  amount  of  fun(!  , 
])ayable  only  at  a  fixed  time,  at  about  the  same  interest 
rate.  !)y  the  sale  of  its  bonds.  All  this,  of  course,  is  re- 
ganling  the  (jucstii-n  nurdy  from  one  point  ol'  view. 

The  (|uestion  of  interest  paynu  nts.  thtii,  is  the  one 
that  specially  interests  the  iliart<re(l  banks.  Thev  in- 
sist that  •'{  per  cent  is  loo  much  lo  pay  when  the  cost  of 
manageuicnt  is  .-dso  considt  rrd.  Just  wjiat  is  the  cost 
of  management  is  indicated  by  a  statenuiit  fuiriished 
on  .\i)ril  21',  r.»i;{.  by  .Mr.  .1.  K.  Hourke,  Controller 
of  the  (  ii'Tcni-y : 

(  ii.st  jti  r  ('(///,  n'lr  lilies  hfin!.  dcjxisil.s. 
Cost  of  managinicni  and  interest  paid: 

( Jo\  (1  luiicnl  sa\  inns  banks .'J.i  j' ; 

I'osf-otliff'   sa\  ings    b.ntks ',i.]'2'  , 

A\(  rage  rate .'J.I.'J.T  . 


Tin-:    RANKS   AND  THE   GOVKRNMKNT         M)7 

To  which  niiist  he  add'd  intcivsl  oji  ^old  reserves 
(10  per  cent  of  hahmce)  and  interest  on  l)ank  hahmee 
iKjiiired  to  f)e  held  to  meet  withth-awals  (say  J^oOO.OOO) . 

l''Ji'eetive  rate  allowing  interest  on  o^old  reserves  and 
liaiik  balances  at  3  per  cent,  .'}.t51  per  cent. 

/'or  fixca]  !ic,ir  l()l  1    12. 

Average  balance  (tleposits) $57,()()(),()()() 

Expcuxcs: 

Salaries.  printin<r.  etc 12().0(M) 

Interest  piiid  depositors l.()H(). •'$(>.'{ 

Interest  at  .'{  per  cent  on  ^old  riservc  of 

>i<5,7(i(),()()0 172,800 

Interest  at  >\  j)er  cent  on  bank  balance  of 

$500,000 1,3.000 

Tocal    $l.t)HH,10.'J 


Under  the  ren;nlations,  deposits  bear  interest  from  the 
first  day  of  the  tnonlli  sncceediiig  that  in  wliieh  the  de- 
posit is  made,  and  interest  is  charged  on  withdrawals 
from  the  first  day  of  the  month  on  which  the  w  ithdrawal 
is  made.  The  gain  in  interest  which  is  thns  made  (S.'jc,- 
.'!!>S)  offsets  the  charges  for  rent,  fnel  and  liglit.  A 
more  detailed  statement  of  the  cost  of  management  and 
interest  paid  follows: 

(lo-icniincnt  fidxiiiffs  Ixnik. 

Ax  crage  balance  dm  ing  !!ni-r„' *U.000.000 

Salaries,   etc S'iO.OOO 

Interest  paid 421;  ,800 

Total *t.V-'.H00  a.U^o 

(,— \  11    .;: 


4f)S  MONKY    AM)   HANKINCi 

Post -office  .sa'citi^.s  hanks. 

Avera«re  balance  dvivm^  1911-12 $43,200,000 

Interest   i)ai(l $1,257,503 

Estimated  cost  of  nianagenient 
(salai'ies.  eonmiissions.  print- 
ing, etc. ) 90,000 

Total    $1,347,503  3.12^'r 


i  ■ 


It  Mill  l)e  seen  from  this  statement  that  the  govern- 
ment pays  virtually  3l  [,  per  cent  for  the  use  of  these 
(lei)osits.  when  interest  and  cost  of  administration  are 
included.  On  the  other  hand,  the  Dominion  can  borrow 
in  the  London  market  at  about  4  i)er  cent.  It  will  be 
si'cn.  therefore,  that  little  gain  accrues  U  Mie  Domin- 
ion througli  these  banks.  On  the  other  liand,  they  have 
not  greatly  stimulated  savings;  for  the  deposits  have 
remained  almost  stationary  during  recent  years.  When 
it  is  recalled  that  the  chartered  banks  have  branches  in 
almost  every  town  and  village  in  Canada  it  can  be  seen 
that  the  need  for  |)ostal  savings  banks  is  not  very  acute. 
They  draw  money  away  fiom  the  commercial  banks  of 
the  country,  that  might  otherwise  Ik-  ctnj)loyed  in  the 
business  of  the  nation.  i\^  long  as  the  chartered  banks 
ai-c  willing  to  receive  deposits  of  $1  and  u])v.ards,  and 
aie  willing  to  furnish  banking  faciliti(^  to  every  section 
of  the  country,  it  cannot  be  said  that  there  is  any  great 
need  for  government  banks.  Perhaps  the  oidy  justifi- 
<  at  inn  of  postal  savings  b;mks  is  that  they  regulate  more 
or  less  ttic  interest  rate  i>aid  on  dej)osits  by  t!ie  rhartercii 
banks. 

547.  dit'fipcr  niiricnitiiral  credit. — Heci-ntly  a  stn.ng 
fi(>man(i  has  t)eeri  made,  especiaHy  m  xhv  \\ Csi.  ior 
cheaper  credit  facilities  for  tl      farmers.     It  is  hoped  th'' 


THE   BANKS   AND  Till:   GOVKllNMKNT 


tno 


■:  '  H  : 


oovernment  will  eiu'()ura<?e  the  formation  of  co-opera- 
tive credit  societies,  or  else  will  make  loii^-timc  loans 
to  the  farmer  somewhat  after  the  Australian  plan.  The 
government  of  Saskatchewan  lias  displayed  the  greatest 
interest  in  this  movement.  It  sent  a  commission  to  Eu- 
rope in  1013  to  study  the  question,  and  to  make  sugges- 
tions for  some  measiu'e  that  would  result  in  furnishing 
credit  to  the  farmers  at  a  low  interest  rate.  This  is  a 
l)rol)lem  that  has  excited  also  the  deepest  interest  in  the 
Iriited  States. 

Could  rur.'l  co-operative,  credit  societies  be  safely 
formed,  the  farmer  would  undoubtedly  benefit.  The 
farmers  in  the  West  are,  as  a  rn\c,  of  the  debtor  class; 
although  many  are  in  a  \ery  j)rosperous  condition. 
These  latter  have  comfortable  homes,  own  automobiles 
and  may  evcji  ])ossess  a  bank  account.  They  prefer  to 
conduct  their  business  on  the  principle  of  keeping  out 
of  debt. 

But  many  of  the  more  prosperous  element  are  not 
independent  of  the  banks.  In  a  sense,  all  farmers  are 
interested  in  banking,  whether  they  have  a  siu-jjIus  at 
the  bank  or  not;  whether  the  ruling  ])rices  are  high  or 
low;  whether  their  business  is  j)rosperous  or  depressed. 
.Mniost  all  farmers  can  make  use  of  c/edit  to  improve 
tlieir  condition,  to  make  a  good  farm  better.  Moreover, 
it  is  not  at  all  certain  that  the  farmer  who  makes  it  a 
rule  to  keep  out  of  debt  really  does  so.  11'  he  has  no 
•surplus  he  recpiircs  credit  for  domestic  ])urposes,  arid  to 
larry  on  his  business.  11  is  i?i(lebl(Miness  to  tjie  store- 
keeper is  as  real  a^  if  !»'  wcrt^  iiul'  hted  to  the  banker. 
II  has  the  ad(]e<l  disadvantage  that  the  system  of  bny- 
'4  on  credit  from  the  store-keeper  is  likely  to  cause  a 
iiueh  greater  consumption  of  his  means  than  would  b*.- 
<  titailed  liy  any  interest  rate  he  would  pay  his  banker. 


rll 


.500 


MONEY   AND  BANKING 


For,  in  the  first  place,  tlic  store-keeper  who  sells  on 
credit  must  buy  on  "ion^^  time";  he  thus  starts  in  hy 
payin<4'  'long  time"  prices,  and  he  nmst,  therefore, 
char'^e  "lono-  time"  profits.  Tlie  farmer  may,  indeed, 
be  surrounded  by  credit  stores,  and  may  pay  up  to  100 
per  cent  for  tlie  use  of  money;  although  all  the  time  lie 
is  under  the  impression  that  he  is  living  up  to  the  prin- 
ciple of  "keeping  out  of  debt."  The  fact  is  that  he  will 
be  really  out  of  debt  o?dy  when  he  can  keep  an  open 
bank  account  Avhich  will  enable  him  to  place  his  busi- 
ness on  a  cash  basis. 

548.  Co-operative  credit  s()ciefieft.-~\y\\]  the  co-opera- 
tive credit  society  permit  him  to  do  so  in  Canada?  To 
a  certain  extent  that  has  been  answered  by  the  establish- 
ment of  co-opcM-ative  people's  l)anks  in  Quebec.  M. 
Desjardins  was  the  originator  of  this  movement  in 
Canada,  and,  in  fact,  upon  this  continent.  He  organized 
the  co-o])erative  bank  of  Levis  in  1900,  of  which  he  has 
ever  since  been  the  i)resident  and  manager.  The  suc- 
cess of  this  institution  was  so  striking  that  many  similar 
societies  have  been  established  in  the  Province  of 
Quebec. 

Knowing  the  prejudice  of  the  French  Canadians  for 
anything  resembling  uidimited  liability,  M.  Desjardins 
adojjted  a  princi])le  similar  to  that  prevailing  anions 
the  mutual  savings  baid<s  of  the  New  England  States. 
In  these  there  is  no  capital  stock,  the  depositors  alone 
])rovi(lingthe  fimds,  and  enjoying  the  right  to  withdraw 
their  money  almost  at  will,  a  mere  notice  being  required 
if  the  necessity  of  so  doing  arises. 

The  working  capital  of  these  credit  banks  is  com- 
posed of  shares  and  deposits.  The  distinction  between 
a  share  and  a  deposit  is  that  the  former  is  made  up  oC 
savings  with  a  view  to  providing  for  needs  more  or  less 


THE   BANKS   AND  THE   GOVERNMENT 


501 


Rinote.  The  sliares  are  similar  to  tinK'  deposits.  The 
deposit  consists  of  money  put  aside  for  daily  use  like 
the  checking  accounts  at  a  hank. 

Tlie  main  idea  of  this  system  is  very  largely  that  of 
tiic  uncai)italized  savings  hanks  of  the  United  States. 
There  is  this  difference,  however,  that  the  savings  of  the 
working  classes  are  loaned  to  such  working  people, 
^\hetiler  in  tlie  towns  or  tlie  country,  as  happen  to  he 
in  need  of  funds.  This  has  eliminated  the  professional 
money  lenders  and  the  usurers  who  have  taken  advan- 
tage of  the  necessities  of  the  ])oor. 

Tliere  is  hut  one  rule  which  guides  the  policy  of 
making  loans — the  sums  advanced  nuist  he  put  to  some 
leally  useful  and  productive  purpose.  Experience  of 
more  than  a  century  in  Europe,  and  of  thirteen  years 
in  Quehcc.  proves  that  institutes  of  savings  and  credit, 
in  tlie  form  of  co-operative  credit  societies,  are  prac- 
ticahle  among  the  huuihler  classes. 

It  should  not  he  forgotten,  however,  that  the  co-oper- 
ative people's  hanks  are  associations  deaUng  only  with 
their  memhers.  The  j)ersonal  factor,  therefore,  is  em- 
phasized, (iood  habits  and  j)ersonal  integrity  count  for 
much  in  these  associations.  Moreover,  the  societies  must 
he  restricted  to  narrow  circles  in  the  community;  for  the 
whole  scheme  rests  upon  i)ersonal  contact  and  per- 
sonal knowledge.  Tlie  basic  idea  is  not  the  building 
up  of  huge  societies;  hut  rather  of  societies  that 
will  he  able  to  look  after  the  wants  of  their  borrowing 
members. 

Eoans  may  he  made  for  long  peri^xls,  even  for  ten  or 
lifteen  years,  once  the  guaranty  fund,  made  up  of  sur- 
])lus  ])rofits.  has  reached  a  certain  proportion  of  the 
g(  neral  assets.  Intenst  rales  are  made  as  low  as  the 
average  rate  in  the  louiniiniily :  but  they  must  be  matie 


III' 
f\ 

III 


■!i 


'f 


502 


moni:y  and  baxkixg 


sufficiently  liii-h  to  i.^Anwi  hiiuls  to  the  society.     While 
these  co-operative  credit  societies  have  proved  of  ^reat 
service    in    the    Province    of    QMel)ec.    in    their    limited 
si)here,  it  is  douhtiul  whether  they  would  prove  an  e(iual 
success  in  the  Kn^lish-speakinn'  provinces,  and  especi- 
ally in  the  i)rovinces  of  the  West,     it  is  the  opinion  of 
many  mIio  are  entitled  to  he  heard  on  such  a  matter  that 
they  would  not.     The  humbler  classes  would  prefer  the 
])ostal   savings  hanks  as  depositaries   for  their  savinos 
to  any  co-()i)erative   society.       In   the   West   the  diffi- 
culties   in   the   way   of  estahlishino'   such   societies   are 
even  greater.    For  one  thing,  the  population  is  in  a  fluid 
state.     The  peoi)le  are  not  intimately  acciuainted  with 
each  other.     They  would  hesitate  to  make  a  full  state- 
ment of  their  affairs  to  a  conmiittee  of  their  neighbors, 
as  IS  necessary  in  granting  a  loan  by  a  credit  society. 
JMoreover.  their  business  operations  are  conducted  on  a 
comjjaratively  large  scale.     Those  who  have  money  find 
that  the  chartered  baid^s  can  take  care  of  their  Inisiness, 
Those  who  are  borrowers  can  get  accommodation  from 
the  banks,  which  have  an  office  in  almost  every  settle- 
ment.    It  is  true  the  interest  rates  are  high  in  compari- 
son with  those  obtaining  in   the   East;   but   when   the 
risk  and  the  cost  of  administration  are  considered  it  does 
not  appear  that  the  chartered  banks  are  charging  exces- 
sive rates.      Kew  shareholders  could   be   found    for  co- 
operative baidxs    if   interest   rates    were    below   current 
(|uotations.     It  is  com])aratively  easy  to  find  ready  bor- 
rowers in  the  West  at  prevading  rates.     When  all  these 
facts  are  considered  it  must  be  coid'esscd  that  tlie  n.- 
oju-rative   credit   .society    will    hardly   become   a    serious 
factor  in  banking  in  the  West.     Hut  undoubtedly  pres- 
sure will  i)e  hiougiit  to  licar  upon  cillierthe  federal  gov- 
i'rnmcnt  or  upon  tlir  |)ro\  im-ial  administrations,  or  u])on 


I 


THE  BANKS  AM)  THH  GONKRNMENT 


503 


both,  to  find  ways  and  means  for  providing,  if  [)ossible, 
I  lieaper  credit  to  the  farmers  of  the  AVest.' 

'Thf  Royal  Commission,  appointeii  by  tin;  govcnimciil  of  Sasivat<  hewan, 
li,i~  np(jrte(l  (N'ovenibiT,  19l;ij  in  favor  of  a  system  iif  rural  iriMlit  liaM'd  iipcm 
liic  l.andschaften  of  (icrniany.  The  outline  of  Iho  schenic  is  as  follows:  There 
si;, ell  lie  an  executive  committee  of  three  members,  appointed  by  the  government, 
and  nil  advisory  committee  of  fifteen,  nonunate<l  l)y  the  local  societies.  Local 
Mil  icties  shall  consist  of  not  less  than  ten  members,  with  control  ov<t  land  sufficient 
III  raise  loans  aggregating  at  least  $.3,000.  Loans  will  be  made  on  ap|)roved  lands 
up  to  40  per  cent  of  their  value.  Funds  will  be  raised  by  selling  bonds  guaranteed 
liy  the  province,  anil  .secured  by  the  lands  held  by  members.  Members  will  be 
jiiiiitly  aiid  .severally  liable  for  any  loss  that  may  occur;  but  the  liability  of  lach 
sli.ill  be  limited  to  one  ami  one-half  times  the  amount  of  his  loan. 

It  is  proposed,  aLso,  to  estiiblish  a  central  bank  for  the  .six'ieties,  with  the  help 
of  the  government.  Loans  will  be  made  on  the  liasis  of  personal  .security.  If  these 
soiieties  are  establishi'd  n(j  injury  will  be  tloiic  to  the  business  of  the  chartered 
banks;  if  anything,  their  business  will  be  increased,  as  the  local  societies  will  act 
as  feeders  to  the  present  banking  institution-i. 


^1 


,#■ 


QUIZ  QUESTIONS 


(The  numbers  refer  to  the  numbered  sections  in  the 

text.) 

CHAPTER  I 

1.  Name  the  chief  reason  why  the  study  of  money 
and  banking  is  of  advantage  to  the  business  man.  Is 
it  fair  to  })hice  as  much  bhune  u{)()n  Icgishitors  for  a 
bad  currency  system  as  upon  architects  for  a  bad  build- 
ing? 

2.  Were  warnings  given  of  the  panic  of  1907? 

3.  What  is  the  relation  between  the  sciences  of  money, 
finance  and  economics? 

4.  What  is  the  science  of  finance? 

5.  Show  how  every  business  has  a  technical  and  a 
business  side. 

6.  AVhy  is  business  the  result  of  the  specialization  of 
labor? 

7.  Name  the  phases  of  production. 

8.  How  is  the  changing  of  ownership  productive? 

9.  Wlien  did  the  value  of  exchange  begin  to  be  recog- 
nized? 

10.  In  what  countries  are  tlie  rights  of  private  prop- 
erty most  strictly  enforced? 

11.  Distinguish  between  property  and  wealth.  Is 
money  wealth  ? 

12.  What  is  the  effect  of  the  integration  of  industry? 

.504 


QUIZ  QUESTIONS 


505 


CHAPTER  II 

13.  Describe  three  stages  of  economic  history  based 
on  the  method  of  excliange. 

14.  What  are  the  obvious  hmitations  of  exchange  by 
barter? 

15.  Show  how  the  introduction  of  a  medium  of  ex- 
change simphties  trade.  Exphiin  why  "all  trade  is 
iiiially  barter." 

IG.  Show  that  money  represents  incomplete  ex- 
changes. How  does  the  miser  differ  from  other  people 
in  his  attitude  towards  money?  Show  the  similarity  be- 
tween money  and  a  railroad  ticket. 

17.  Define  credit.  AVhat  other  meaning  of  the  word 
sometimes  leads  to  confusion? 

18.  Why  is  credit  a  good  medium  of  exchange?  Do 
you  think  that  merchants  and  bankers  earn  their  incomes 
as  truly  as  farmers  or  laborers? 

19.  Are  money  and  credit  real  wealth?  Would  you 
expect  a  millionaire  to  have  much  money  in  his  posses- 
sion? 

20.  Distinguish  between  production  and  consumption 
t>oo(ls. 

21.  Describe  tlie  entrepreneur  system  of  production. 

22.  What  is  cajjitaH  From  what  source  does  it  de- 
rive its  ecoiiiomio  importance? 

23.  Define  "capitalization."  How  is  it  possible  to 
know  when  a  corporation  is  over-capitah/.ed? 

24.  From  whom  comes  the  demand  for  capital  goods 
and  for  what  purpose?  How  may  the  entrepreneur  ac- 
quire purchasing  power? 

25.  On  what  human  xuouncs  dues  the  atvumuiatioii  i>i 
capital  depend? 


••i  • 
1' 


JOG 


MONKV   AND    HANKING 


'2(».  Name  four  methods  l)y  wliidi  the  saver  of  tlie 
income  may  invest. 

27.  Show  liow  a  f^ooj  currency  system  increases  the 
incomes  of  all  producers. 


CHAPTER  III 

28.  Explain  how  value  is  a  register  of  economic 
forces.  Explain  the  meariing  of  the  phrase,  "prolit  is 
the  mainspring  of  industry." 

29.  (iive  a  definition  of  the  word  "value."  What  is 
meant  })y  the  expression  "common  measure  <>t'  value":' 

30.  (iive  the  legal  definition  of  the  dollar. 

31.  What  is  the  sole  utility  of  money?  Why  is  it 
loanable? 

32.  What  object'ons  are  there  to  gold  as  a  standard 
of  value? 

C3.  Show  why  the  cost  of  production  theory  of  value 
is  unsatisfactor}'. 

34.  State  lirielly  the  utility  theory  of  value. 

35.  Define  "marginal  utility."  Show  how  it  is  illus- 
trated in  tliC  demand  for  automobiles. 

3(5.  \\'h,it  is  tjie  "law  of  satiety"?  Wh;it  is  its  relation 
to  tlie  theory  of  marginal  utility? 

37.  Hov  mav  the  two  theories  of  value  be  reconciled? 


»-t 


CHAPTER  IV 

38.  Define  "exchange  utility." 

3'.).  What  commodities  were  first  used  as  standards  of 
value? 

■10.  A\'hat  three  functions  of  iiiotu-v  were  dcxeloned 
in  primitive  money? 

41.  What  was  wampum?     ^^'hat  gave  it  its  value? 


QllZ  QlESTIONS 


507 


42.  Why  were  beaver  skins  used  as  money  by  the 
t'aily  settlers  of  the  rnited  Stalest 

13.  What  were  the  cUsadvuntages  of  agrieultural 
|)r()(hicts  as  money? 

44.  Wliat  Uiws  were  passed  in  A'irginia  to  maintain 
l!ir  vahje  of  tobacco?  Did  they  succeed?  Compare  the 
(Instruction  of  growing  tobacco  phuits  in  early  Virgmui 
i.)  the  same  acts  committed  by  the  "night  riders"  in 
Kentuekv  in  1900.  To  what  modern  form  of  currency 
in  the  Ignited  States  may  the  "tobacco  notes"  be  com- 
pared ? 

45.  Name  the  ([ualities  which  must  be  possessed  by  a 

good  currency. 

40.  Why  is  the  (juality  of  divisibility    lecessary? 

47.  Whv  were  beaver  skins  unsuitable  for  use  as 
monev  on  account  of  their  lack  of  uniformity? 

48.'  Why  slioukl  a  substance  used  as  money  possess 
the  quality  of  cogni/ability  ? 

49.  Wliy  have  civili/ed  countries  generally  adopted 
<rold  and  'silver  as  iiioney?  Do  tiiese  metals  possess 
stability  of  value? 


^1 


CHAPTER  V 

30.  Why  were  silver  and  gold  the  fittest  standard-  to 

survive? 

51.  Name  the  good  qualities  of  silver  ami  gold  as 

money. 

52.' When  and  where  was  platinum  used  as  money. 
Why  was  the  experiment  a  failure? 

53.  Name  the  defects  of  gold  and  silver  as  money. 

54.  How  have  two  of  the  defects  of  gold  and  silver 
been  overcome? 

55.  How  did  the  earlier  coins  get  their  names? 


i 


/>,' 


508 


MOXKY  AND  BANKING 


50.  Xame  three  requirenients  of  good  coinage. 
Wliut  nu)tives  led  to  the  debasement  of  the  coinage? 
AVho  was  injured  by  the  debasement  of  the  coinage? 

57.  Wliat  is  the  essential  (juality  of  the  standard  of 
value? 

58.  Why  ■would  silver  disappear  from  circulation  if 
the  demand  for  its  use  in  manufactures  increased;" 

59.  What  is  dresham's  I^awf 

GO.  How  did  the  earlier  legislators  atiemi)t  to  deal 
with  the  eifects  of  (iresham's  Law!'     What  result? 

fil.  Give  a  brief  sketch  of  Kngland's  experiena'  with 
the  double  standard. 

G2.  How  did  England  come  to  adoj)t  the  single  gold 
standard? 

(>.'}.  What  effect  has  minting  upon  the  value  of 
metals? 

04.  Define  "legal  tender." 

05.  What  were  y* 'exander  Hamilton's  ])roi)o.  ^.s 
respecting  coinage  in  the  Tnited  States  in  17i>l  !" 

OC).  Why  was  the  ratio  of  15:1   unsatisfactory? 

(57.  ^^'hy  was  there  no  gold  coined  in  the  I'nited 
.States  before  IH.*}!? 

«">H.  \\  jiy  did  Hie  newly-coined  silver  dollars  disaj)])ear 
fit)m  circuiation? 

i't\K  What  chimge  did  Congress  make  in  the  ratio  in 
IH.'U?     What  was  Lhe  (  llVct  ? 

70.  What  change  occurred  in  the  standard  in  IHO.'Ji' 

71.  How  was  the  single  gold  standard  adopted  in  the 
rnifcd  States? 

7'_'.   !"'or  wb;il  did  the  Act  '.f  1<M)()  provide? 
78.  liricfly  sum  up  the  evolutioti  of  tho  standard  in 
tiie  Tnited  .States? 


QllZ   QIESTIONS 


50!) 


CHAPTER  VI 

74.  Show  why  gold  is  defective  as  a  standard  of  de- 
ferred payments. 

75.  Find  ilhistrations  to  prove  the  economic  ad- 
\  antage  of  the  enforcement  of  contracts. 

70.  How  may  contracts  be  impaired  by  legal  tender 

laws? 

77.  On  what  gronnds  were  the  Legal  Tender  Acts 

declared  constitutional ' 

78.  Why  were  the  defects  of  gold  as  a  standard  of 
(Ifferred  i)'ayments  the  cause  of  the  free  silver  agitation 
in  1896? 

CHAPTER  VII 

70.  Distingulsli  clearly  between  value  and  price  and 
show  that  tlie  ])rices  oi  ;oods  depend  as  much  upon  the 
\alue  of  money  as  upon  the  value  of  the  goods. 

80.  How  is  it  possible  for  prices  to  rise  when  the  con- 
ditions of  supply  and  demand  seem  to  warrant  a  de- 
cline? 

81.  What  is  the  utility  of  money? 

82.  Distinguish  between  "desire"  for  moiuy  and  the 
(conomic  "deniand"   for  it. 

8;{.  Name  and  deline  three  varieties  of  moniy. 

8i.  (iive  illustrations  of  tiat  and  credit  money. 

8.').  Analyze  the  demand  for  money. 

8('..  What  determines  the  rajtidily  of  cii'ulalion  of 

money? 

87."  \\'b.at  effect    las  population  on  the  d(  tiiatwl   for 

money  ? 

88.  What  is  the  relation  between  division  of  labor  and 
If  •  cireulatioii  ot  moru'y :  What  viirri  ii;i>  the  niie^ra' 
lion  of  industry  on  the  circulation  of  money? 


•  M 


i! 


h. 


m 


:,io 


MONKV    AM)    llANKlNr. 


f^A 


80.  ShoH-  how  foreign  trade  may  result  in  a  special 
demand  i'or  gold. 

90.  Sliow  hou-  eontractr,  sometimes  affect  the  demand 
for  money. 

91.  Does  the  nse  of  money  as  a  store  of  value  affect 
the  demand? 

92.  What  effect  upon  the  <iemand  I'or  money  arises 
from  insecurity  of  contracts  and  property? 

93.  Under  what  circumstances  may  it  he  advisahle  for 
jiersons  to  lioard  money? 

94'.  Is  hoarding  a  cause  or  an  effect  of  a  panic? 

95.  Define  "hoarchng."  ^^'hat  is  its  effect  on  the 
value  of  moneys  \Vhat  are  some  of  the  injurious  in- 
direct effects  of  a  hank  I'ailure  connected  with  money' 

9(5.  What  is  the  essefitial  differencv-  hntween  a  private 
and  a  hank  store  of  money? 

97.  Is  the  money  in  the  (Jovernment  Treasury  a 
hoard? 

98.  Docs  the  demand  for  money  always  fall  ecjually 
upon  different  varieties  of  money? 

99.  (iive  illustrations  of  seas()nal)le  A  mands  for 
money. 

100.  How  far  does  international  trade  create  a  de- 
mand for  money? 

101.  What  are  the  ')ad  effects  of  a  j)remium  on  gold? 
10"J.   Name  some  reasons  why  the  demand  for  money 

is  \iry  irregular. 

lO.'J.  What  is  the  uncertain  element  in  the  sup|)ly  of 
money  ? 

lot.  Why  is  gold  practically  the  only  elastic  eleinmt 
in  our  ein'rency  ? 

10,*).  Does  the  (|uantity  of  gold  actually  produced  in 
a  country  determine  the  sup|»l\    in  that  eoinitry? 

100.  What  factors  determine  the  supply  of  gold? 


QllZ   (^IKSTIONS 


511 


a 


107.  Explain  how  the  utiUty  of  gold  has  little  connec- 
tion with  its  quantity. 

108.  What  are  the  advantages  of  an  increased  supply 

of  money? 

lOU.  Why  are  the  temporary  results  of  a  change  in 
the  money  supply  likely  to  he  serious  even  though 
ultimately  the  effect  may  he  ///// 

110.  Trace  the  history  of  a  hrick  of  new  gold  and 

its  effects. 

111.  Why  does  not  the  circulation  of  new  gold  con- 
tinue to  raise  prices  indefinitely  f 

112.  What  would  he  the  effect  on  prices  if  the  minor 
should  choose  to  hold  the  gold  coins  or  paper  money 
(•(luivalent  for  the  gold  which  has  increased  tiie  money 
supply  of  the  country? 

li;j.  What  is  tlie  effect  if  the  miner  deposits  the  new 
gold  [n  a  hank?  Show  how  the  effect  of  new  gold 
spreads  throughout  the  world.  \Viiat  advuitage  has 
tiie  country  producirig  gold  over  other  countries? 

114.  wiiat  would  he  the  effect  of  an  =ssue  of  paper 
money;  com])ared  with  gold? 

ll.'i.  IIow  is  it  possihle  to  determine  how  much  money 
is  needed  hy  a  country? 

IIG.  What  difficulties  arise  from  the  facts  that  jmce 
changes  are  not  synehron<»us? 

117.  Show  how  rising  prices  stimulate  itidustry. 

118.  Why  is  not  an  increase  in  the  supply  of  moTiey 
always  an  unciualified  lu'tiefit ' 

1  l"u.  (iive  some  illustrations  of  the  universal  law  of 

rlivthm. 
Vjo.  What  is  the  conseiiucnce  of  the  cumulative  effect 

of  economic  forces? 


#-r-- 


512  MONKV   AM)    BANKING 

CIIxVPTKU  VIII 

121.  Explain    how    every    debtor    has    sold    money 

"short." 

122.  How  are  the  sliorts  "sqiu  ezed"  in  the  money 

market? 

123.  Explain  why  priees  of  stocks  may  deehne  so 

suddenly? 

124.  \vhat  effect  will   the  hetter  education   of   the 
people  in  financial  affairs  have  upon  the  fluctuations  in 

values? 

12.}.  What  is  meant  by  the  general  p    jc.  level? 
12r).  What  is  a  price  table? 

127.  Why  should  a  price  table  not  be  confined  to  a 
few  commodities? 

128.  II<nv  are  price  tables  cDnstruetef'i? 

121).  For  what  purpose  is  "weighting"  of  price  tables 

used?  , 

130.  V/hat  are  the  advantages  of  "weighting   ? 

131.  Why  does  tiie  Faulkner  Frice  table  show  prices 
to  be  so  higli  during  tb.e  Civil  War? 

132.  What  are  Index  Numbers?  i^repare  a  chart 
illustrating  the  rhythmic  swings  of  prices.  Account  for 
the  greater  swings. 

133.  Describe  some  of  the  important  index  numbers 
prepared  by   Kuropenii  statisticians. 

134.  \\'liat  are  the  most  imj.ortant  forces  to  be  reck- 
oned witii  in  forecasting  changes  of  llie  general  i)riee 

leveP 

la:,.  What  is  ihe  elfec  '  of  exeessive  savu.LT  on  pros- 
perity? State  the  rule  for  predicting  general  price 
changes. 


QlIZ   (ilKSTIOM 


il.T 


W 


CUxVPTER  IX 

136.  What  is  the  diifercncc  between   domestic  and 

foreign  exchange  ^ 

137.  How  may  payments  be  made  without  tiie  use 

of  cash? 

138.  How  do  banks  faeilitate  payments  without  the 

use  of  cash? 

139.  Wliy   is   New   York   Exchange   so  universally 

acceptable  ? 

UO.  How  do  ])anks  all  over  the  country  get  their 
power  to  sell  New  ^'()rk  exchange? 

Ul.  Tell  how  the  banks  handle  New  York  exchange. 

U2.  How  do  banks  settle  balances  between  them- 
selves ? 

1+3.  What    are   the   items   of   expense    in    shipping 

nu-rency? 

U4.  How  do  the  United  States  subtreasuries  assist 
the  banks  in  the  settlements  of  balances ^ 

U.3.  How  is  tiie  price  of  New  York  exchange  de- 
termined' 

Ud.  What  is  tlie  signilicance  of  rates  of  domestic 
exchange?  Explain  why  it  is  imi)ossible  for  a  com- 
munity to  lose  all  its  cash  in  the  sittlemeiit  of  balances? 

Ut!  How  does  the  clearing  house  principle  api)ly  to 
domestic  and  foreign  t\<'hange? 

Its.  Htm  may  tlie  use  of  cash  be  eliminated  even  in 
the  settlement  of  balances f 

UO.  Why  are  th'    movements  of  gold  so  important? 

1 .")().  \\'hat  is  the  ecoiiomic  function  of  the  dealer  ui 
foreign  (\ehange' 

.  .1  ,■  •  ...I J....l..fc       r.       llv 

i.jl.     iiovv      »i<>     1  iU       loiiij^Ii     ■    »v:..:..,_         ,:    -.:     ■ 


an  working  cupi 


tal  to  their  customers 


C-\II     :i:i 


.Hi 


MONEY    AM)    15A\KING 


,f: 


■  :-     I  '  : 


1^ 


1.52.  W'liy  are  bankers  williiig^  to  purchase  drafts  oi 
exporters^ 

l.).'J.  \Miy  are  New  York  banks  always  willing  to  pur- 
chase foreign  drafts? 

\.')4:  Define  stei'ling  excliange. 

I.'}').  II'  the  I'Jighsh  jjouud  sterling  contains  113 
grj'.iiis,  how  is  it  possible  to  determine  its  vahie  in  I'nitcd 
States  money? 

!.)().  I  low  is  the  cost  of  shipping  gold  across  the 
Athuitic  calculated? 

l.)7.  What  is  the  minimum  price  of  demand  sterling 
exchange? 

l.")H.  Why  is  it  impossible  under  normal  conditions 
for  sterling  exchange  to  sell  higher  than  ''*^  t. 88(5.5  ? 

1.59.  P'.xplain  the  conditions  whieh  made  it  possible 
for  the  price  of  demand  sterling  to  fall  to  ^i.S'.i  in 
:Mareli.  T.>()7. 

1()().  Describe  the  Knglish  gold  bullion  market. 

Kil.  How  was  il  possible  for  llie  Hank  of  l''rance  to 
maintain  a  '.i  percent,  discount  rate  in  l'.»0(>,  while  funds 
could  ])e  loaned  in  London  at  <»  per  cent.? 

1  ('.'_*.  A\'b;it  is  the  significance  of  shijjments  of  gold 
to  foi'cign  countries? 

1  (!.'}.  Mention  certain  j)eculiarilies  of  our  foreign 
romnieree. 

Kit.   What  are  the  "itnisible"  items  of  foreign  trade? 

ir»,5.  Show  how  capital  mo\es  from  one  country  to 
another. 

ICiCi.  Show  tliat  interest  and  dividend  payments  to 
foreigners  aU'eet   tin   SD-ealled  foreign  trnde  balance. 

Hw.  What  elfeet  u|)on  tbe  demand  for  foreign  ex- 
change is  exerted  by  the  iV.et  that  American  merebiiiidic 
IS  carried  in  foreign  sliips? 


QW/.   (^IKS'llONS 


.51.> 


1(>8.  IIow  do  American  tourists  in  Europe  affect  tlie 
(Kniaiul  lor  i'orci«,ni  exchange? 

1  (>•.».  What  ])oints  are  worth  mentioning  in  a  daily 
newspaper  article  on  forei^ni  exchange? 

170.  Kxj)lain  the  "London  Settlement." 

171.  What  is  meant  by  "cables"?  By  speculation  in 
tnrcign  exchange?  By  "covering  movement"?  By 
iiiaiiipidation? 

172.  Explain  tlie  several  varieties  -^f  exchange. 
How  are  their  values  determined? 

17:}.  What  is  demand  sterling  and  Mhy  do  diftVrent 
(Itniand  bills  sell  at  dilFerent  prices?  At  what  rate  of 
iiiteiest  are  long  bills  discounted? 

17k  \Vhat  is  the  business  of  London  bill  brokers? 

17.').  What  is  the  eff'ect  on  tiie  i)rice  of  exchange  of 
an  issue  of  GO-day  finance  bills?  The  effect  (>0  days 
later? 

17(5.  Upon  what  does  profit  on  finance  bills  depend? 
Slio'v  that  their  issue  is  cfiuivaknt  to  borrowing  money 
aliroad.  What  efl'ect  does  their  isstie  have  upon  rates 
of  interest?  What  advantage  does  London  possess 
over  other  financial  centers? 

177.  What  are  the  advantages  to  a  bank  from  hav  g 
a  foreign  dei)artment? 

178.  Why  is  a  man  who  wishes  to  travel  abroad  likely 
!o  transfir  his  deposit  account  to  a  bank  which  can  sell 
iiiin  a  letter  of  credit?  Sui)pose  you  have  a  letter  of 
credit  issued  on  a  dejKisit  account.  If  you  asked  for 
'  10  at  the  Deutsche  Bank  in  lierlin  on  a  day  when 
Mcriing  was  (pioted  at  M.  '20.4.3,  how  jiiueli  would  you 
nali/.c  in  marks?  For  how  much  would  your  deposit 
K count  be  del)ited  when  the  draft  reached  home,  if  ster- 


iiig  exchange  \\.is  selling  ai 


MM() 


170.   What  are  the  advantages  of  using  a  comme 


rcial 


% 


m 


I! 


m 


h^ 


516  MONFA    AM)   HANKING 

letter  of  credit?     \\'hy  are  banks  all  over  the  world 
ea<rcr  to  cash  letters  of  credit ( 

180.  Suppose  I  want  to  borrow  £10,000  for  00  days. 
Demand    sterling    sells    at    $4.88    and    the    Bank    of 
England  rate  is  5  per  cent.     At  the  end  of  00  days  de- 
mand sterling  sells  at  -$4.84.     I  can  loan  funds  at  hoiii 
for  0  per  cent.,  what  profit  can  1  make  by  selling  finance 

bills? 

181.  A  Philadelphia  banker  sells  a  draft  for  210,17.3 
Kronen  on  Vienna.  By  cabling  to  Vieiuia  he  learns 
that  sterling  exchange  is  worth  'J-t  Kronen  IT^-  heller 
(100  heller  =  1  Kronen).  The  current  price  for  de- 
mand, sterling  in  rhiladelpiiia  is  $4.8(>.5.  What  i)n)lit 
can  be  made  by  l)uying  sterling  to  cover  if  he  sold  the 
draft  on  \'ijnna  for  $.'2030  per  Kronen f 

182.  Would  there  ])e  any  ])rolit  in  an  arbitrage  trans- 
action at  the  following  ([notations? 

Sterling  in   New  York     $4.88.3 

Francs  in  London  2.).  10 

Francs  in  New  York  .3.10  "s  less  1-.32 

Show  the  ])rotit  on   $1,000  invested  in  the   arbitrage 
transaction. 


CHAPTER  X 

183.  What  is  the  world's  stock  of  gold  and  silver? 

ISt.  IIow  much  silver  is  it  estinn-itcd  that  the  world 
has  ]>!oducedf  Why  did  mining  decline  after  the  fall 
of  the  Roman  Empire? 

18.3.  IIow    were   wars   financed   dining   the    Feudal 

180.  What  was  the  effect  produced  by  the  new  stock 
of  silver  from  America^  • 


QUIZ  QUKSTIONr 


jl  / 


1S7.  Show  the  effect  of  American  silver  upcMi  eeo- 
iioinic  eoiuhtions  in  Europe. 

188.  What  is  binietalHsni? 

18!).   What  are  some  of  the  difficulties  of  maintrinlng 
a  bimetallic  standard?     Why  did  the  difficulties  arise 
i      ,,iilv  in  the  nineteenth  century? 

1«U).   Wliat  are  the  advantages  of  bimetallism? 

1<>1.  What  is  meant  by  the  single  standard?  What 
i  the  place  occupied,  under  the  single  stanilard,  by  sub- 
sidiary coins? 

VJ'2.  Give  an  account  of  the  early  attempts  at  inflation. 

VXi.  What  was  the  reason  for  the  formation  of  the 

Latin  Union? 

19-t.  What  were  the  effects  of  the  demonetization  of 

silver  by  the  Tnited  States? 

lit.').  Explain  the  significance  of  the  acts  of  1878  and 

18<t(). 

\W.  What  effect  had  tlu  closing  of  the  Indian  mints 
to  the  coinage  of  silver.  ui)on  the  problem  of  bimetallism? 

1«>7.  What  were  the  reasons  for  the  final  failure  of 
bimetallism? 


1?1 


I" 


CTT.APTER    XT 

108.  ^Vhat  was  the  economic  condition  of  Canada 
after  the  Contiuest? 

101).  Who  controlled  the  wholesale  trade  of  Canada 
after  the  Conquest  ?     IIow  di.l  tlu  y  aflVet  the  monetary 

svstem? 

L»00.  Describe  the  monetary  system  of  tlu'  c-ouiitry. 
•  .«l.   Give  an  account  of  early  experiments  in  media 
i  (  xchange. 


o\S 


MONEY  AND  1} AX  KING 


*i 


202.  "Why  Mas  Halifax  (.•unriicy  aclopled  as  tlic 
staiulardf  (jii\e  an  account  of  the  \aiioiis  vdiiis  in  cir- 
culation and  tiicir  ratinijs. 

20.'J.  Describe  the  changes  in  Canadian  iiiou'v  after 
the  American  Revolution. 

204.  AVhen  was  the  York  siiilling  depriveii  of  k-ual 
recognition?     Why? 

205.  AN'ith  wliat  did  the  act  nf  1808  dealf 

20(5.  De^'-rihe  the  dual  function  of  the  early  nu  •- 
chants. 

207.  Outline  the  early  exchange  business  carried  on 
between  Montreal,  Xew  York,  and  London. 

208.  Describe  the  paper  money  issues  during  tiie  war 
of  1812-1 8U. 

209.  AVhat  M'as  tlie  etl'ect  of  the  army  bills  on  Ca- 
nadian business? 

210.  What  were  the  causes  which  led  to  the  foundii  _r 
of  the  ]Jank  of  ^lontreal  ? 

211.  ^^'hose  ])rinciples  Mere  ad()])ted  In  founding  the 
first  Baid^  of  Montreal^  ^^'hat  other  cities  established 
ba.     ,  shortly  after:" 

212.  Describe  the  chief  features  of  its  articles  of 
association.  A\'liat  Mere  the  ditfercjices  in  the  attitude 
of  the  i)e()i)le  of  Tpper  and  Lower  Canada  to  bank 
notes?     AVhat  Mere  the  results  of  this  attitude? 

21.'}.  \A'liat  is  the  liistory  of  the  first  l)anks  in  Ipper 
Canada?  AVhat  Mas  the  effect  on  the  other  Canadian 
baid<s? 

214.  AVhy  did  Cireat  Britain  go  on  a  gold  l)asis  in 
IHKl?    Describe  the  attempted  currency  reform  in  Can 
ada  resulting  from  this  change. 

21."»,  W'juit  ^^Hs  the  l•,.s!!!^  ;.•'  (Ivf-'A  Vi-Hxl^^'^  :iifii=..:.f 
to  enforce  a  monetary  standard  in  C  anada:* 

21G.  Describe  the  attcm]){  made  to  regulate  Can:idian 


Ql  IZ  (QUESTIONS 


ill) 


•al 


currency  by  bills  of  exchange  drawn  on  the   British 
Treabury. 

'_'17.  What  were  the  cliief  characteristics  of  Cana- 
dian currency  in  the  second  (juarter  of  the  nineteenth 
iciitury? 

•_MH.  What  sort  of  coins  circulated  in  Canada  in  the 
second  (jtiartcr  of  the  nineteenth  century '.  Why '.  What 
sort  of  a  currency  did  the  mercantile  and  bankhig  in- 
tcest-s  f;i  or  at  tiiis  time? 

- 19.  Describe  tiie  state  of  the  currency  after  the  union 
of  l/pper   md  Lower  Canada. 

L'20.  (iive  an  account  of  the  sliort-time  debentures 
of  184h,  and  their  resemblance  to  government  paper 
money. 

221.  What  bearing  had  the  crisis  of  1857  on  the  cur- 
I'ency  question  in  Canada!" 

222.  When  did  Halifax  currency  cease  to  be  statu- 
tory money:'     AVhat  currency  system  took  its  ])lace:' 

223.  (ii\e  an  account  of  tl  first  attempt  of  A.  T. 
Gait  to  issue  government  notes. 

224.  Describe  the  conditions  oi'  the  provincial  note 
issues.  Why  were  they  aut  orized?  What  was  the  atti- 
tude of  the  banks  toward  these    lotes? 

22.5.  What  was  the  nature  of  the  legislation  ])assed 
in  18(J8  and  1870  concerning  Domhiion  notes?  Is  there 
any  profit  to  the  government  in  issuing  tluin? 

22G.  AVhat  later  legislation  was  there  concerning  Do- 
minion notes? 

227.  What   was  the  result   of   Sir  Francis   Ilincks' 


legi 


ation 


t  fi 


228.  What  is  legal  lei   ler  money  in  Canada? 


.3iJ0 


MOXKV  AXh  15A\K1.\(, 


CIIAI»TKU  Xll 


S*f 


•J20.  What  is  a  credits     How  do  credits  ori'Tinatc? 
'J'M).  Sliow  how   credit  i:,  oj   o.-ait  importance  in  in- 
dustry. 

•j;n.   What  is  the  function  of  comnierciai  l:inki:i«»r 
•Ja-J,   Describe  the  hond  and  inoitnaof. 

•2:i:i.   Show  how  the  use  of  cre(ht  facilitates  the  hiniher 
inchistry. 

'2:U.  Describe  the  characteristics  o»  tiin'her  })onds. 
•211').   Why  is  there  sueli  a   ditlVrence  in   tht    interest 
rates  of  (hfrerent  classes  of  bonds.' 

2.'J().  Wliat  are  the  advantaocs  of  lonn-tinie  borrow- 


"i«" 


2.*J7.   Sliow  liow  credit  econo?ni/es  thi'  use  of  nohl. 

2.'J8.   What  dan<4er  h"es  in  the  h"(|ui(iation  of  credits^ 

•J.'M).  Wiiat  efrect  have  the  conunercial  jjaper  houses 
on  the  credit  system:' 

240.  ''.N'hat  (juahties  nnist  cre(h"t  have  in  order  to  eir- 
cuhite  as  a  medium  of  exchanne:' 

•241.  C'ompare  the  two  forms  oi'  ban!;  circulating 
credit. 

242.  How  Is  a  deposit  credit  utih'/ed  '  What  kind  of 
bank  cre(h"t  do  thickly  settled  communities  usef 

243.  What  is  meant  by  the  elasticity  of  thposit  credit  ^ 
When  will  deposit  credits  depreciated  \\'hat  causes 
credits  to  be  licpiidated' 

244.  Show  how  (.■o|,J  fs  the  basis  of  ail  credit. 

^  24.1.   Wjiat  are  the  reserve  re(|ulremcnts  of  the  Xa- 
tional  IJank  Act:" 

24r,.   TTow  much  reserve  sliould  a  Iiank  keep? 
247.   llow  IS  credit  an  element  of  great  danger  hi 
panics!' 


I 


q(  [/:  ni  i;.--i"in.\',>  521 

•JtS.   ^Vhy  is  credit  ;i  siii»jt('t  mil  uuitliy  of  iiivcsti- 

CllAPTKH  XIII 

249.   What  is  the       tieral  etlVet  of  the  use  of  eredit 
on  J t rices  f 

•J.);).  Descnl)e   the   various    eti'ects    oi    the    (hllVreut 
kiiids  of  cre(nt  on  iM-icesf 

•J.Jl.   Show  how  tiansactlons  may  l>e  setth'd  without 
the  use  of  niotiey  at  aiL 

•J.")2.  Show  how  a  lessened  (kniand  for  money  causes 
a  rise  iii  prices. 

2.5.'}.  \Vliat  effect  does  an  issue  of  national  hank  notes 
liave  upon  piices^ 

2."j4.  Explain  the  ditt'erence  in  circulation  of  I'uiik 
notes  and  checks, 

•2.">.>.  Has  government  cre(ht  money  a  greater  or  hss 
(fleet  on  prices  than  hank  notes ^ 

2.j().  What  is  the  relati(,n  l)etween  cre(ht  and  specu- 
lation^ Dilferentiate  hetween  legitimate  and  illeniti- 
inate  specuhition. 

2.57.  How  may  specuhition  l)e  hoth  the  cause  and 
effect  of  a  rise  of  prices!" 

2.*)S.  Descrihe  tlie  conditions  which  cause  a  contrac- 
tion of  credit. 

CIIAPTKH    XIV 

2.59.  Name  the  varieties  of  government  cre(ht  cur- 
rency. 

2t;0.  What  is  the  essential  element  in  liat  money? 

2G1.  What  are  the  factors  determining-  the  value  of 

credit  money  ^ 

202.  What  is  tlie  danger  in  the  use  of  credit  mone>  ? 


Hh 


^•3 


11 


i  I 

I'll 


MOM^V  AND  BANKINC 


1 1  *■ 


What  devices  are  used  to  inaiiilaiii  tlic  value   ol'  ercdit 

iiioiay' 

'2('}li.   W  ail  issue  of  eredit  nioiicy  is  (.xeessive,  v 
will  l)f  the  eU'eet  on  its  value f 

•JCi.  Does  iiiakiiiH'  ereiiit  money  le^al  tender  prevt 
its  depi'eeialionf 

•J«i.).   Why    is    H(,vernnient    credit    ij^oney    not    ideal 

money  ( 

•_'<;<;.  What  are  some  of  the  dit^ieulties  of  adjusting 
tlu-  supply  of  oovernn.ent  ertnit  money  f 

lm;7.  What  was  the  feelino  of  the  people  re.yardin^ 
od\crnment  issues  hefove  IKClf 

■jr.H.  Why  are  o(,\  crnnK-it  honds  not  credit  money? 
What  prohiem  was  I'aised  !)y  the  tinancinj^  of  th«-  Civil 

XS'arr 

•_>•;<).   What  are  some  of  tlie  di' advantages  of  <i()vern- 

inenl  deht  ( 

•_'70.  Why  are  notes  a  /greater  element  of  weakness  iii 
government  tinanee  than  honds' 

•J71.  Contrast  ^oTrnnient  l)orrowinj4  with  that  ol 
])i'i\ate  eoncenis. 

•_'7-i.  If  an  issue  of  eredit  money  is  excessive,  what 
will  he  tiie  effect  on  its  value? 

(  IIAPTKH  W 

'J7.'{.  Classify  the  j>ro<hi(ti\  c  industries  into  thrct 
^idiips. 

•J74.    Keeapii:-.'ate    the     fundamenlal     piineiples     ol 

exchan^ic. 

•.'7:).   Show  that  a  cndit  is  a  contract  to  pay  monc\ . 

•_'7(;.   Whiit  is  the  husincss  of  a  hank' 

•_'77.    In  wh.Ml  two  ways  do  hanks  supply  a  medium  of 
exchaniic  ? 


I 


Qiiz  Qri:sTioxs 


52:j 


■ 


•27H.    Kxplain  why  l)anki!i,u'  is  a  iiuasi-puljlie  ruiu'lKiii^ 

■J71>.  How  (Iocs  the  l)aiik  act  as  a^xiit  hrtwicii  the 
capitalist  and  ciitrepreiicur ^  Kxphiin  how  the  hank  is 
a  (hstrihiiter  of  c'a])ital. 

•J«().  Wluit  haiikiii<>-  priMcii)le  is  it  the  viohition  of 
which  causes  a  hirj^e  proportion  of  Isank  faihu'esf  Name 
Ihiee  reasons  wliy  hanks  shonhl  not  h)an  funds  to  l»e 
(diixeitcd  into  fixed  eai)ital. 

•J81.  Trace  the  ev(.hition  of  the  two  main  functions 
(if  hanking.  Contrast  the  IJank  of  An»stcr(hini  Avitii 
ilie  Hank  of  Kni-land. 

282.  What  are  some  of  the  peculiar  privileges  of 
liankers' 

2Ha.  l)isi)r()vc  the  statement  that  "l)aiiks  create  ca])i- 

284'.  From  what  souros  doe :  a  hank  ohiain  its  cai)ital 
and  credits 

28.").   What  are  the  three  essential  hankinu'  oj)erations^ 
280.  How  is  the  i»anker  the  '"arhiter  of  in\  estmenf  f 


(  HAPTKH  XVI 


287.  Does  a  hatik  lend  credit  or  money?     Show  that 
rredit  as  a  medium  of  exchanue  is  supirior  to  mon*  \ . 

288.  Show   how   credit    promotes   the   pioduiiion   ol 
.'I  II  >ds. 

28<».    How  d(t  hanks  create  credits' 
2'.M).    \N'h\    is  l)ank  en dil   prefi'rahle  to  cash' 
2!M.   Show  how  hank  credit  passes  from  hand  to  hand 
'  ithout  l»einu  litpiidated. 
2'.>2.    Show    the    similarity    helween    elircks    and    tiaiik 

notes. 

2'.>M.   On  wlial  does  the  larnlnu'  power  of  a  Itank  dc- 


ill 


!24 


MOXF.Y  AND  iSAXKIXf 


1    ^     AS.-: 

i  I  m 
fr 


|)cn(l:'     Docs  llic  National   liaiik  Ac'i   limit   \]\v  ainoiiiit 
of  loans  a  hank  may  makcf 

•J'.»k  Docs  it  maki'  any  diirci-ciicc  to  a  bank  wlictlu  i 
it  loans  ca>li  or  credit:"  Illustrate  the  point  hy  an  ex- 
ample. 

•J!>.).  Why  is  the  control  of  i;i-cat  stores  of  casji  so 
^rcat  a  prize  in  Wall  Street.'  A  national  hank  in 
Kalama/oo.  Michi/^an,  i-ecei\is  ;i  cash  deposit  ol'  SI. 000 
which  is  left  foi-  one  year  intact,  no  checks  hcin<.i'  di'aw  ii 
a<^-ainst  it.  The  hank  has  no  dillicnlty  in  loaning-  to  lt^ 
own  customers  at  ')  i)er  cent.  These  customers  make 
all  their  |)ayments  hy  check  and  de|)osit  all  their  receipts 
in  the  hank.  Calculate  tlu'  yross  profit  \\\\\vh  the  hank 
can  make  on  tiie  -"^LOOO  deposit.  lea\in<i'  out  of  account 
all  c.\|)enses  of  doin^'  husiness. 

•JIM).  What  factors  dctci'mine  the  amount  of  deposit 
currency  axailahlc  in  this  counti-y  at  any  ^i\<ii  time' 
liy  what  means  minht  the  maximum  limit  to  the  amount 
ht  raised^ 

•JOT.  .Show  how  the  lack  of  coopeiation  hetwcen  tin 
hanks  causes  them  to  lose  |)art  of  their  rest  r\  es 

•JOH.  liy  what  methods  may  a  l)ank  replenish  it> 
reserve:* 

•JOO.  What  Is  a  seoiidary  reserve?  Ts  there  an\ 
danger  in  this  |)olicy ' 

.'{00.    Do  honds  constitute  a  reliahle  ri  ser\(' 

.'{01.  (.'an  the  .Secretary  of  the  Ti-easury  aece|)t  ofliri 
than  ( Jovernnient  honds  as  security  for  deposits  of  (io\- 
ernuii  nt   funds' 

CTTArTKlt  XVII 

'M)'2.  How  does  a  hank  statement  difT'er  from  n  mer- 
cantile form  ^ 

•Mli.    How    d.K  s  the  staliriient   <tf  tlie  national   ()anks 


I 


m 


(HI/,  ^^i  r:sr loN^ 


Oi.) 


,,n,vr  llic  validity  of  tlic  (k'jx.Mt  cunx-iicy  tlicovy  ?    How 
iiiucli  (Kposit  ciinciu-y  is  tlRft  in  llic  I'liitcd  States f 

.•{Ok   Why    d"    111*'    ixsoiuxcs   and   liabilities   exactly 
I  ;a  1.1  nee' 

■  ;}().■).   What  do  tlie  iteius  on  Use  liability  side  sio-iufyf 

llnsv    (j..  ehan^es  in  the  values  of  resources  atrect  the 

st.ileiuent ' 

;{()<;.   What  are  "eoneeaied  assets""^     Are  they  good 

]Hilicyf 

;5(»7.    l)istiii«^uish  between  discountin<4  and  loaning. 

.'{OS.    What  is  an  ov.r-dral't  '. 

•")<•     Where  do   the   securities   held  as  collateral   on 

Imiiiis  ai)|)iai'' 

;{10.    IIow    are    the    (hposits    of    the    Tnited    States 

( ,(i\i'innient  seeuied .' 

:{11.  \\'hy  do  banks  soiiietinies  carry  governnient 
i.diids  in  theii-  o\\  n  \aults^ 

:?rj.    What  is  meant  by  the  preniiuin  on  I  "nited  States 

;{|:{.  What  is  inehnhd  under  bonds,  securities,  etc.. 
;iiid   why    has    this    item     inenasrd    greatly    in    recent 

\  t  ars' 

:{]  ^.  .\re  banks  iisnally  the  owners  of  the  large  biiild- 
iiins  in  whieh  their  otliers  ari'  situated' 

;{1,-).  What  is  th(  la-v  regarding  the  hohbng  of  real 
(  stale  by  a  bank  .' 

.•{1»;.   What  is  mcarit  by  the  item  "dui'  from. national 

banks'-^ 

.'{IT.    What  is  Ml    ";il»|tlo\({|  reser\e  agent" 

.'{IH.    What  are  easli  Items' 

:{|1».   Wh\   d<.  national  b:inks  seek  to  have  on  hand  as 
lew  '\tnk  not(  s  Ms  jxissibb  ' 

\-2i).    What  ar(   bgal  tt  iider  notes' 

.TJl.    What  Is  th.    Htdemptioii  I'nnd' 


526 


-M*)M.\    AM)  J!A.\K1.\(, 

.'{22.  ^NN'hat  is  inrliKlf,!  undci-  -(luc  lumi  (he  I 
State;*  Treasiirv"".^ 


iiit(,(i 


CIIAPTKH  XVIIl 


.*i2.-{.    Wl.v  is  tl 


ic  miniiimm  capital  of  a  hank  prnpo,. 
;;;;"^'l  '"  tli^'  m/c  ..r  thr  rity  i„  which  it  is  h.catcl' 
lliioictically   h.nv   h.r.uc  ,|,onhl   the  capital   of  a      a.iL 


i 


DC 


lilt'. 


Stocks  r 


•J2^M\hat    IS   the   (I.H.hk-    hahility    rcaturc   of  hank 
\N  liy    IS   the   ahovc   distinction    made   h.  tue( 
".••Ilk  a, Id  other  stocksf     Ilnu    is  ,t  p„ssihle  for  the     ap- 
if.'il  of  a  hank  to  i)e  really  (ietitioiisr 

••{2.-,.    What   is  the  purpose  of  the  sMrj)]tis.'     What   i 

"'*•  •■^■'I'lirenient   of  the    National    H;,nk   .Net    .v-ar.    ,„. 

sm-l'i.is^     Why    do   son.e   hanks   start    uith    a    C,rpln^ 

>N  hal   ,s  meant   hy  the  -hook-valne-  of  har.k  str.cks.' 

'{2i;.    ^^  hat  disposition  is  nltimateh-  made  ol     lu' item 
'■midi\id((|  |)rotits""r 

.'{27.    What  inducement  is  there  for  the  hanks  to  take 
out  cMcuIation ! 

.•{2S.    Kxplain  (he  item  "State  Hank  \ntes  Outstand- 


.•{2'.».    I-Xplain   the  item  -mdix  idual   depnsils.-      What 
is  a  ct  itificate  i?f  d(  posil  ' 

,   •'•^"     ''"•*'■'•    ^^''■^'    .-iHlitinns    do.s    the    <.-over.,m<nt 
d»'I)«isit  in  national  l.,iiiksf 

•■{■n.    IXplain  Ih,    i|,i,i  ■hoi.ds  horruu<(|.- 
•5-{2.    What    is   11,..  diH-eniHv   ImIu,.,,,    Anieri.'Mn   ..uul 
'''"••"I'*''"'  '•••"•kin^  in  Ih,    niatterof  rcliscountin-.^ 
'■i'i'i.    \\  ha!  are  \hr     hills  pa^ahle-'nfa  hank'  ^ 
••{••U.    What   is  (h.    rll'ret  of  eert  ifyitin  a  check? 
:i'.r>.    What  is  a  ■•cashi,  i\  eJKck"'' 


QUIZ  l^rilSTloN: 


5Z1 


ClIAPTKH  XIX 


.'J30.  What  five  institutions  art-  calkd  •hanks'"? 

.'J.'JT.  What  is  Ihc  (hircrciicc  htturen  national  and 
staU'  hanks? 

iV.iH.  What  is  the  jji-incipal  husiness  of  hirjjc  i)rivatc 
lianks? 

.•{.'{^».   Descrihf  "niukrwritin^f."' 

().  What  is  thf  (hff'ciriuT  hrlwttii  the  trn>>t  com- 
pany anil  a  hank?  How  did  the  trust  company  get  its 
name? 

."Ul.   Afc  trust  comi)anies  r((iiiired  to  kee|)  reser\es? 

:iV2.  What  is  the  nature  of  the  dejjosits  in  trust  com- 
panies ? 

lii'.i.  What  departments  are  re(|uired  in  a  trust  com- 
jiany  ? 

.'U4-.  What  are  the  functions  of  a  trust  company  as 
individual  trustee? 

.'U.).    I)es(  rihc  the  coii)orate  trusts  of  a  trust  company. 

'.iU\.   Whv  is  a  sa\in<4s  liank  really  not  a  hank  at  all? 

.'{ tT     Dcscrihe  the  oigani/at  ion  of  a  hank. 

'MH.    Desciihe  the  exolution  ol'  a  l)ank  in  a  small  town. 

.*U'.>.  Whei-e  is  ultimate  authctrity  loeated  in  an  iii- 
ciuporat  ."  hank  ? 

;{.")().  \Vhat  are  the  re(|uircments  for  directors  named 
in  the  .National  Hank  .\ct  '  What  is  tin  penalty  on 
directors  if  they  allow  the  law  to  he  violated  f 

;{.")l.  What  considi  :  tions  govern  the  choice  of  di- 
iT'ctors? 

;{.VJ.  .Vccording  to  the  courN.  what  Is  the  responsi- 
hility  <if  hank  directors'  How  may  the  directors 
ascertain  tlu'  true  condition  of  (he  liank? 

M.")."}.   Of  what  value  is  the  plea  of  ign.  ranee? 


^1 


il 


528 


MONEY  ANb  BANKING 


!    H 


.'J,5t.  Can  directors  ixly  iiiij)licitly  on  the  reports  of 
national  examiners^     W'iiat  two  types  of  loans  should 


directors  he 


I'aniil 


lar  witli 


'•i.').').  What  should  he  the  attitude  oi'  hank  directors 
toward  loans  to  otlicers  and  other  directors^ 

.'}.)().   What  are  tiie  duties  of  the  president? 

.*}.;7.  Who  is  the  chief  executive  otHcer  of  a  hank? 
What  is  tht  importance  of  the  credit  department  of  a 
Imnk? 

.'}.>H.  \\'hat  are  tiie  duties  of  the  paying  teller?  Dis- 
count ch-rk? 

li.y.).  What  are  the  duties  of  the  receiving  teller? 
I'lom  what  foui'  sources  do  funds  come  into  a  hank? 

:j«)0.   What  are  the  (hities  of  the  note  teller? 

.'J(»l.  l)esci'il)e  the  work  of  the  discount  clerk  and  show 
wjiy  he  is  husy  (hu'ing  a  j)eriod  of  acti\-e  speculation. 

.'}()2.   Mention  the  important  hooks  kept  hy  a  hank. 

M<!.*J.  What  is  the  law  with  regard  to  collections? 
What  risk  is  connected  with  a  tram])  collection? 

.'{(i4.   What  is  the  i-esponsihility  of  a  collecting  hank? 

.'it;.').  What  is  the  expense  of  collecting  out-of-town 
checks?  What  schemes  ha\e  heen  proj)osed  for  lessen- 
ing the  expense  of  collecting  country  checks? 

'.HU\.  What  is  the  Knglish  method  of  collecting 
count rv  checks? 


CIIAPTKU  XX 

'M>7.  Distinguish  hetween  general  and  special  de- 
posits. 

:U)H.  How  did  the  Legal  'I'ender  Acts  work  a  hard- 
shi]»  to  the  dcjxisitors  during  the  War'  How  far  is  a 
liank  rcsponsihle  ff>r  s])ecial  .Itposits? 


QUIZ  (iUESTlONS 


i^2«J 


.*{(»!).  What  advjuita^xs  do  the  salcty  deposit  vaults 
hriii^'  to  ;i  hank:" 

;}70.  What  arc  the  inducements  offered  to  depositors 
liy  tlie  hanks' 

,'{71.  Dcscrihe  the  iHHicullies  in  tlie  way  of  cstal)lish- 
iiio-  a  new  hank. 

.'}7'J.  Why  are  (lei)ositors  h)yal  to  ohl  and  conserva- 
ti\e  hanks;' 

:i7'.i.  When  do  (lei)ositors  practice  the  "kiting"  of 
ilucksf 

;J74.  Ilhistrate  the  method  of  "kiting." 

.•}7.').  Siiov.-  how  the  title  to  deposit  checks  often  l)e- 
(I lines  an  important  {juestion. 

87(5.  Give  an  illustration  of  a  case  of  disi)uted  owner- 

^llip. 

:}77.  \Vhat  is  the  law  regarding  the  acceptance  of 
deposits  hy  insolvent  hanks  ^ 

;J78.  What  risk  does  a  holder  run  l)y  retaining  a  check 
too  long!' 

.•J79.  \Vhat  is  meant  hy  "reasonahle  time"  in  the  case 
(if  a  local  hank' 

.'{HO.  What  recourse  has  the  holder  if  a  l)ank  refuses 
to  j)ay  a  check? 

.*{81.  Can  a  depositor  stoj)  payment  on  a  chc  k? 
What  elfcct  has  the  death  of  a  depositor  upon  checks 
not  yet  paid!' 

:iH2.  Can  a  hank  pay  a  check  if  funds  to  th.e  credit 
of  till'  depositor  aic  insullicient  f 

.'iS.'}.  What  is  a  hank's  liahility  in  the  case  of  a  forged 
.heck  : 

;{S4.   May  a  hank  pay  a  post-dated  check  hefore  it  is 

(h.e? 

;{H.j.  \Vhat  is  the  cfrc(  i  of  tlie  fact  that  the  relation 


5;;o 


MnM;^    AM)  I'.ANKIX, 


hi'twt'cii  tlic  liiiiik  iiiul  till'  (lipositor  is  thai  of  (lcl)t(ir 
and  creditor.''    What  is  meant  hy  ■"set-off'"^ 

'Mi'}.  1  f  a  hank  holds  a  depositoi-'s  unsecured  note  and 
the  depositor  fails,  what  ri^ht  has  the  hank  to  his 
deposit ' 

'{87.  If  a  hank  fails  may  a  dej)ositor  pay  his  note  to 
the  l)ank  hy  a  cheek  on  his  dejxisit  f 

."{SH.  Show  that  till'  "set-of!"'  may  make  failures  ap- 
|>ear  worse  than  they  ixally  are. 

.*W.>.    Illusti'ate  the  fore^oin^-  hy  a  concrete  case. 

.'}'.»().  Sjiow  liow  i)anks  sometimes  protect  ti.emsclvcs 
against  loss  throu/i'h  a  horrower's  insolvency. 


CHAPTER  XXI 


.'101.  What  two  qualities  arc  essential  to  the  making 
of  tl,.'  banker? 

•'{'.>2.   W'liat  is  meant  hy  inxcstnit  iit  loans ^ 

.'ii'.'J.  Fnder  what  conditions  are  inxcstnicnt  loans 
gond  haid<ing  loans^ 

.'{'.> k  What  are  "  •  lustria!  loans ^  Show  jiow  they  are 
secu'-ed.     What  are  rediscounts!' 

.'}!),}.   Wjiat  is  meant  hy  "Capital"  loans? 

*}0().  Should  a  hank  loan  a  concern  money  t'or  the 
consti-n.tioii  of  a  plant  ? 

.'{f>7.   ^\'hat  Ciii-porations  lend  mf»ney  on  mortgages!' 

.'{!)S.  How  are  the  loans  classified  in  the  reports  to 
the  ('(iinptroller:' 

.'}{)!).  What  changes  liave  taken  ])la«'e  in  ten  years  in 
the  ])roj)ortion  of  the  demand  loans!' 

M)0.  \^'llat  docs  "douhlf  name  ])ai)er"  represent!'  Is 
this  paper  mucli  used  in  largi'  cities? 


(^riz  (^riisiioNs 


331 


lor 

11(1 
Ills 

to 

ip- 

'C'S 


4-01.   Distiii^iiish    hctwccii    ■tradt""    and    "hrokcrs"  " 
paper. 

K)2.   What  provisions  distin^^iiish  the  /pid^Muiit  note' 

K).'{.   Name  the   |)i()\  isions  of  the  eolhiteral  note  In 
\Jiieh  'he  hank  pi'oteets  itself  against  h)ss. 

K)l.    \/hat  risk  is  in\<)l\ed  in  eolhiteral  loans  f 

J-O.j.   lv\[)lain  what  is  meant  hy  le^al  rate  of  interest. 

K)»i.    IIow  are  call   loan   rates  of  o\ei'    100   per  eent 
consistent  with  the  usury  lawsC 

1-07.    Why  do  eonsei'x  ati\  e  hankers  ohjeet   to  loaning' 
nil  hook  aeeounts ' 

WH.   What    is  the  task  of  the  linaneial  manager  of 
an  enterprise  f 


"M 


IIS 


I'e 


iC 


to 


in 


CIIAPTKK  XXII 


K)!).  What  classes  of  property  may  serve  as  collateral 
for  loans' 

110.  What  are  some  ol'  the  dillieiilties  of  using  mer- 
( liaiulise  as  collateral  1 

HI.  What  art'  the  advantages  of  good  warehousing 
lausr 

H"jf.  Show  that  loans  on  merchandise  are  a  legiti- 
iiiate  functi<in  of  hanks. 

H.'}.  \\'liat  was  the  early  practice  ol'  the  Corn  J'>x- 
cliange  Hank  of  New    ^'o|■k!' 

HI-.  Why  is  merchandise  hetter  collateral  now  than 
tormcrly  ' 

H.').  lIow  docs  (he  new  uniform  law  safi'guard  ware- 
house ri'ceipts  ^ 

i]>'>.  What  are  the  risks  Iinolved  in  loaning  on  ware- 
house receipts  f 


f  n 
I 

i 


:l    '^ 


53ii 


M()M;\    AM)  liANKlMl 


417.  What  JUT  tlif  rc'sp()ii^il)ilili(.^  of  a  warclioiiscniaii 
under  the  i)reseiit  hiw  ' 

418.  I  low  is  the  issue  of  i-eeeipt^  sate<i,uar(le(l .' 
41t>.   What  protection  is  aironied  to  holders  ol'  re- 
ceipts.' 

420.    Is  garnishment  alh)\ved' 

4-Jl.  What  is  the  [)enalty  for  the  illegal  issue  oi 
receipts' 

42'J.  Wliat  do  some  hanks  suhstitute  for  warehouse 
recei{)tsf 


CHAPTKU  XXII I 


111 


i'2',i.   Wlien  (hd  ere(ht  departments  appear  in  l)anksr 

424.    Name  the  soiu-ees  of  crecht   information. 

42.3.  How  far  are  the  credit  a,i;'encies  to  l)e  depended 
upon:' 

42(i.    What  are  the  (hities  of  the  cre(ht  man: 

427.  What  is  the  husiness  of  the  conunerciai  note 
broker:' 

42H.  What  ehann-e^  have  taken  phiee  in  the  conuner- 
ciai pa|)er  business  i-ecently' 

42i).  Tpon  what  do  the  demand  and  supply  of  com- 
mei-eial  paper  depend ' 

4.'J().  .Show  how  a  country  possesses  areas  of  hi^^h  and 
low  interest   I'ates. 

t..*il.  What  four  inducements  may  a  dealer  in  com- 
mei'cial  j)api'r  otrer  to  a  borrower' 

i:i2.  What  is  the  best  guaranty  against  loss  furnislK<l 
by  a  dealer  in  commei'cial  pa])er^ 

4.'}.'}.  What  is  the  usual  si/.e  of  ?iotes  handled  by 
dealers  in  commercial  jjaper^     I  low  art'  they  (pioted' 


(^l  IZ    (H  1->1'1<»N> 


5'M 


C  IIAPTKK  XXIV 


ilU.  What  were  the  characttri sties  of  early  hanking- 
111  the  Tiiittd  States^ 

i;{.}.    W'liat  was  tlie  rehltioii  of  e;irl>    \ni\\ks  with  the 
u(i\  enmient ' 

t;j().   l)i\  i<U'  the  liistory  of  United  States  liaiikiii^'  into 
foiii'  periods. 

4.;}7.   Deserihe  some  of  the  hunks   prior  to  the  First 
Hank  of  the  United  Stati    . 

VM.   What  are  the  dangers  of  pennittin«>'  hanks  to 
loan  on  hank  stoek  ( 

V.i\).   What   were  some  of  the  featnres  of  the   First 
Hank  of  the  United  States^ 

410.  Was  the  Hank  sneeessful?  How  mneh  (hd  it 
I'lid  to  the  •government:' 

4tl.  On  wiiat  uronnds  was  the  First  Hank  of  tlie 
United  States  ohjeeted  to  ^ 

H'2.  Wliy  was  the  Seei)nd  Bank  of  the  United  States 
()i'<i,ani/ed:' 

4V.i.  Compare  the  Seeond  with  the  First  United 
States  Hank. 

444.   How  was  the  ru-eond  Bank  misniana/^ed :■ 

44.").  Wliy  was  President  Jackson  o])])osed  to  the 
Hank^ 

44().  AVhat  ar<,niment  does  the  liistory  of  the  two 
Hanks  of  the  United  States  furnish  agai!\st  a  central 
federal  hank? 

447.  Deserihe  the  Snffolk  Bankinpf  System. 

448.  What  two  plans  of  note  issue  were  tried  in  N'ew 
York  State? 

449.  Deserihe  the  New  York  Safety  Fund  System. 


i 


MICROCOPY    RESOLUTION    TEST    CHART 

ANSI  and  ISO  TEST  CHART  No    2 


1.0 


I.I 


i"2  8       12.5 


-.  \l\M  m  2.2 


IT  1^ 


2.0 


1.8 


1.25 


1.4 


1.6 


A    /)PP1_IED  IM/)GE    Inc 


,14 


MONF.Y  AND  BAXKIX( 


i!     -ii 


4.)().   Dcscrihe  Hu-  bond  dtjjosit  or  free  baiikin 


iX  svs- 


teiii. 


4.)1.   Why  (lid  tli'    Safety  Fur  I  System  i'ail^ 
4.J2.   What  weir  the  eauses  oi  ihe  i'aihire  ol'  the  Free 
Hankitio'   System:'      Was   it   adopted    in   other   States!* 
What   was   its  only  advantage  over  the   Safety    Fund 
System:" 

i.y.i.  What  was  the  experience  of  other  states  with 
their  l)anks^ 

4.U.  Describe  the  Hank  of  Indiana.  Why  was  it 
successful^     Describe  the   State    Hank   of  Ohio. 


(II.VPTKH   XXV 


m 


4.>,>.   What  conditions  led  to  the  Xational  Hank  Act? 
4.")(>.    What  etrect  did  the  Act  ha\e  on  the  market  for 
Fm'ted  States  bonds:' 

4.')7.   (iive  the  early  history  of  the  Act. 

4.)H.    What  are  the  duties  of  the  C'ompt rollei"  ol'  tl 


le 


ui'icncN 


4.V.>.    Xame  the  chief  provisions  of  the  Act. 

!■<;().   Describe  the  issue  and  redem|)tion  of  National 


l)ank  notes. 

4(11.    WJiat   are   the   r 
tional  bankinu  s\  stem  ' 


eser\c  i-ecjuiicmc  nts  of  the  na- 


4(;-.>.    X 


CirAPTKlJ  XXVI 

inie  sonic  of  the  di trerenccs  belwci,  ;i   bank 


note  and  a   drpusit   ciniinc\. 

Ki-}.    What    are   the    liniitatiMis    of   the    d(  pc.sit 
renc\? 


cur 


Ij:  I       I,' I. 


ire^rnt    sysl 


eii!     iniensMics 


stringencies  ;ind  panics  at  ceil; 


on  scnson.s. 


QUIZ  (^l  l^TloXS 


5;}^ 


K;.).  Show  tliat  tlie  (luii<4er  of  depleted  reserves  is 
acute  ill  times  oi'  j)aiiie. 

iCAi.  How  may  an  emer<^eiiev  circulation  lie  issued 
under  the  Aldrich-\'reelaiid  Act:* 

k;?.    \\'h\-  is  the  cii'culatioii  ol'  t)ank  notes  inelastic^ 

WtH.    I'nde!'  what  circumstances  docs  the  hank-note 


CI 


III 


•culation  increase 


,).   What  are  the  disadvantages  of  the  lack  of  unity 


k; 


oin'  svstem 


l-TO.   What  i^  the  importance  of  savin<is  hanks? 

1.71.  Whence  comes  the  need  for  tile  ])ostal  savings 
l.aiiks?     Descrihc  the  Act  of  1910. 

^72.  What  are  the  aru\iments  for  and  a^s^ainst  the 
L'.uaranty  of  Isank  (le[)osits? 


CIIAPTKU  XXVIl 


473.  What  is  the  economic  function  of  Wall  Street^ 

J-74.  Wlieie  do  the  dealers  in  securities  yet  their 
working'  cai)ital ' 

1-7.').   Descrihc  the  method  of  makinj^'  a  collateral  loan. 

i7(;.  How  (Id  the  hanks  ;i\(»id  technical  over-eertiti- 
■  Mtion  ? 

1.77.  What  restrictions  do  the  hanks  make  on  collat- 
eral? 

1.7H.    What   is  the  peeuliarlt\    of  the  call  lo;in  rale  of 

interest  i 

|.7'.».  Show-  win  the  respoiisihilities  of  the  lonn  clerk 
,ii-e  ureat  in  Wall  Strict  Itanks. 

iH{}.    What  are  ^mdiucsled  securities!' 

I.HI.  IIou  does  the  stale  of  the  hank  reserves  affect 
the  prices  of  securities? 

!•«•_'.  What  advantage  wouid  eoiiie  iVoiri  .iiM.iHi^ 
hanks  into  two  classes     commercial  and  (inancial;' 


iV.m 


iM(>Xi:V  AND  HA.NKIXcj 


•J-H.'}.  What  additional  j)nvilcnc,s  .sli„„I,l  be  -iven  t<. 
national  hanks  ' 

■1H4.  Why  is  it  ,)n.,Hr  to  forhid  tinaiicial  l)anks  aetin-r 
as  reserve  agents.''  * 

CIIAPTKU  XXVIII 

■48.5.  In  what  way  is  the  Secretary  of  the  Treasury 
compelled  to  assume  ,no,e  responsihihtv  than  helonu's 
tohisofheer  " 

48(1.  How  does  the  I'nited  States  Treasury  intensifv 
monetary  strinoencies:' 

187.  Are  these  eon(.,(ions  the  result  of  our  currency 
or  ot   the  Treasury  laws!' 

_48H.    \Vhat  expedients  have  heen  used  l,v  Secretaries 
of  the  Treasury  to  miti<^ate  stringencies^ 


It?- 


C'irAl'TFJJ  XXIX 

48!).  Tnder  what  circumstances  was  the  Bai'k  of 
Kn-land  founded  r  I)(serihe  the  husiness  of  the  orio- 
mal   liank  of  Knoland.  ^ 

41M).  What  c.nditions  caused  the  development  of  the 
use  oC  cheeks:' 

4!>I.  What  were  thi'  provisions  of  the  Hank  Act  of 
1814^ 

^  M)-J.   Wh;it   is  the  present  character  of  the  Hank  of 
Kn^land  note:' 

ion.  What  is  the  rclati<.n  of  the  Hank  of  Kn<rlan(I  to 
the  r.ovcrnmcni  ^  ITou  is  the  Hank  ..f  Knohmd  the 
center  <.f  the  hankino-  system  of  Creat    Hritain^ 

40  L    I  )rscrll)e  the  history  of  early  hankin.u'  In  France. 


If\  -         H  '  I 


'""    •"<     »•'*•    uisun«4uisnmy-    lealuics    of    the 

Hank  of  I'rancc? 


QUIZ  QUF.STIOXS 


537 


i'.IG.  To  what  extent  is  deposit  eurreney  used  in 
1  ranee  i' 

41)7.  What  security  is  behind  tlie  notes  of  the  Bank 
of  J'" ranee!' 

4!)8.  Contrast  the  Hank  of  l'],n<;hind  and  Franee  with 
re  t'erenee  to  the  funchunental  prineiple  upon  uhieli  they 
are  based. 

4!t!).  Compare  the  Keielisbank  of  (Jerniany  witli  the 
Hank  of  Knghuid. 

.)()().  How  does  the  government  iiiHueiiee  the  Keichs- 
liank^ 

"iOl.  Sliow  tliat  the  Bank  of  (iermany  is  modeled 
after  tlie  Bank  of  Knghui(k 

.")02.  What  reserves  is  the  Baid<  of  (iermany  reijuired 
to  kee])!' 

CIIAPTKH   XXX 

.)(KJ.   When  were  the  tirst  Caiuuhan  banks  established? 

.)()4.  Knumerale  the  various  provisions  f)f  the  early 
liai'.k  aets  tluit  are  similar  to  those  in  foree  to-day. 

.)().).  When  was  the  banking-  system  as  it  exists  to- 
day founded^ 

.')()»■>.  State  the  genei'al  eonditions  under  wliieji  a  bank 
iiiav  be  ineoi'porated  in  Canada. 

.)()7.  Describe  the  essential  I'talures  of  the  branch 
liank  system. 

,')0H.  Kxjjlain  carefully  the  eonditions  of  note  issue 
in  Canada.  What  pro\  isi(tn  has  bcm  made  foi'  the  issue 
ill'  circulation  during-  the  annual  ei()p-m.)\  in.u  jx  lind^ 

.')()!).  In  what  respects  are  Canadiaji  l>ank  tuitcs  an 
asset  currency !' 

.510.  What  is  meant  l)y  "tlu'  central  gold  res<'rves'V 
How  far  will  they  aid  the  lianks  in  meetuig  an  emer- 
ycncv? 


.11; 


538 


MONEY  AM)  P.AXKING 


oil.  What  are  the  methods  a(l()])ted  in  Canada  to 
insiire  the  (juality  of  hank  notes  ^ 

.■)12.  What  are  the  re(inirenients  of  the  Hank  Act 
uitlt  i-e^ai'd  to  reserves;'  Is  it  safe  or  desiral)h'  to  per- 
mit the  hanks  to  determine  the  amonnt  of  the  i-eserves 
they  will  hohl? 

')Mi.  (iivo  an  estimate  of  the  vahie  of  eaeh  element  in 
a  ("anachan  liank's  ix'serves. 

.51  k  Disenss  the  ,justitication  of  the  practice  of  the 
hanks  in  makin<4'  <"ill  loans  in  \cw  \'ork. 

.)1.>.  Of  wliat  \alue  aie  hioh-elass  stocks  and  honds 
as  a  means  of  maintaininu-  tlu'  resei-ves  of  a  hank? 

.")1(;.  What  relation  do  the  hanks  hear  to  tlie  whole- 
sale and  mannfactni-ino'  husiness  of  the  Dominion:' 
AMiat  is  the  new  provision  of  the  act  with  respect  to 
loans  to  farmers!' 

.517.  How  are  Canadian  hanks  inspected?  What 
were  the  new  provisions  with  regard  to  inspection  added 
in  191.'i? 

.518.  (Jive  an  acconnt  of  hank  failnres  in  Canada  since 
Confederation. 

.51'.).  What  value  may  he  attaejied  to  the  shareholders' 
audit' 

.5-_'().  What  is  the  Canadian  Hankers'  Associa- 
tion ' 

CIIArTKJ{    XXXI 


.521.  AVhat  are  the  main  criticisms  made  of  the  hranch 
hanks  in  Canada'  What  arr  the  ditHcnlties  in  the  way 
of  estahlishing  local  hanks? 

■:.).>       |.' ...  . .  I.. :..    il.      ...    f!        I      !  i     1.  I   •    !     ■!        J  11         ! 

■-■ ;..".  j .";,;;: ;    ;;;;■   ;;;;;;;;;;;'.    r;"\     'iiiii;;;    TiK     i>t'aTi("ii    iuiJiKS 

can   eoncentrale   their   le^al    tender   money    reserves  at 
lhre;ilened    Jioinis. 


Qiiz  ()rr.s'ri<>xs 


r>o 


.")■_'.'}.  To  what  f.xtrnt  do  the  hanks  furnish  hankini*' 
facilities  to  the  popuhitioii  as  a  w  hoU' f  W'ouhl  K)eal 
liaiiks  meet  tlie  situation  Ix'tter:' 

VJi.  To  wliat  extent  are  (h'))osits  used  as  eurrenev:' 
\\  hy  have  the  le^'islators  in  Canada  paid  more  atten- 
iaiii  to  iiott'  issues :"  Is  a  ehiTkiuy  aeeouiit  as  expeiisi\e 
[n  ;i  hank  as  the  issuinu'  of  its  notes:' 

.VJ,').  Discuss  the  justitieation  of  <4ivin<>"  the  riiji'ht  of 
imte  issue  to  the  hanks. 

,Vi().  i\re  the  protits  on  C'anachan  hank  notes  exces- 
sive^ 

.V27.  Is  tlie  sui'])lus  fund  e\cessi\e?  If  so.  in  what 
w.iv  should  it  he  reduced;' 

.VJK.  ^\re  tlie  haid<s  making'  eNcessi\e  pi'otits^  Should 
thcif  note  issues  he  taxed,  in  order  that  the  ^^'ovei'ument 
may  shafe   in   the  hanks'   i)rolit>^ 

.Vi;>.  iVre  the  recent  nier<Jers  of  Canadian  hanks  de- 
slral)lei? 

.VM).  Should  Canadian  hanks  estahlish  hranelies  in  for- 
eiuii  countries;' 

.■j.'Jl.  (ii\c  an  estimate  of  the  value  ot'  the  call  loan 
market  in  Xew  ^'ork  to  Canada  and  its  hanks. 

.y.i'2.  What  is  the  natiu'c  of  the  call  loan  husiness  In 
Canada'     Contrast  with  call  loans  in  Xcw   \'ork. 

'uV.i.  'I'o  what  extent  do  the  hardvs  part  i'-ij)ate  in  "un- 
(Ici'w  !-itiiii4's""  ^  Can  their  aeti\  it y  alonj^'  this  line  he  justi- 
tied^ 

■')'i\.  Discuss  the  Canadian  policy  of  making'  loans  to 
'ill  cctoi's. 

.").'{.").  What  is  the  iclation  of  the  !)aid<s  to  the  trust 
I  impanies ' 

■>.'?().    .Vre  in.terest  cha.rues  \\\  the  W'cvt  e\<'<'ssivc? 

.').'{7.    Is  there  I'oom  in  Canada  for  hraiich  hanks  with 

iiall  caj)ital ' 


!! 


r>\{) 


M()\]'\    WD   i'.ANKIXC, 


."538.  Do  the  Canadian  Itaiiks  pay  a  f'aii-  rate  of  inter- 
est on  {lej)()sits:' 

y.ii).  What  arc  tht  special  problems  t'acin<4'  the  hanks 
during  the  croi)-inovin<>'  ])eriod'' 

5i0.  IIow  do  the  hanks  finance  the  fanners  and  deal- 
ers during  the  niovin*^'  of  the  ci'opsf 

541.  Desci'ihe  the  ])rocess  l)y  which  Canadian  inij)i)i't- 
ers  settle  their  debts  abroad. 

5i'2.  Describe  the  Canadian  clearing-  honse  system. 


CIIAPTEU    XXXII 


iiiti.  Is  the  fj^old  reser\e  behind  the  Dominion  notes 
too  large?     If  so.  how  should  it  be  rivhiced' 

.544f.   Should  Canadian  banks  be  more  hea\  ilv  taxed' 

.'j^.j.  What  are  the  pi'inci|)al  retui-ns  made  I)y  the 
banks  to  the  government !  I  low  may  one  determine  the 
position  of  a  bank  by  these  retui'ns? 

')M).  Are  the  postal  savings  banks,  everything  consid- 
ered, beneficial  to  Canada!' 

5^7-  Can  cooperative  credit  societies  be  expected  t.) 
do  much  to  reduce  the  rate  of  interest  in  tiie  West  ( 


APrEXDIX  1 


GOLD    STANDAHl)     ACT    OF     MAIUU     1  i,     1900 

LrLuuc— No.  ;m).j 

\n  \ct  To  drfinc  niifl  fix  the  ^taIu^lra  of  value,  to  maintain  the  ?■■"•'*>■  "^ 
,„  ,11  fonn.  of  .n.m.y  isMunl  .,r  eoined  by  the  Lnited  States,  to  refund  the 
public  (l.bt,  and   l'.>r  othei-  purposes. 

He  if  enacted  hi/  the  Senate  and  Ilonsc  uf  licprcsentathrs  of 
the  United  States  of  America  in  Con^resn  as.send)led,  Tliut  the 
.Inllar  consist  inn-  of  twcntv-(ive  and  dght-tcntlis  grains  of  gold 
iiino-tcntlis  fine,  as  cstal.lislRcl  by  section  thirty-five  hundred  and 
eleven  of  the  llevised  Statutes  of  tlie  United  States,  shall  he  the 
standard  unit  -d'  value,  and  all  forms  of  money  is.ued  or  corned 
hy  the  United  States  shall  be  maintained  at  a  parity  of  value 
^^■ith  this  standard,  and  it  shall  be  the  duty  of  the  Secretary  of 
the  'rrea.>urv   to  maintain  sucli   parity. 

Si...  .   i2.   That   United   States   notes,   and   Treasury   notes   is- 
sued tnider  the  Act  of  July   fourteentli,  eigliteen   hundred  and 
ninety,  ^vhen  presented  to  the  Treasury  for  redemption,  shall  be 
redeemed   in   -ol.l  com  of  the  standa-d  fixed  in  the  first  section 
„f  this  Act,  and  in  order  to  secure  the  ])rompt   and  certain  re- 
.iemption  of  such  notes  as  herein  provided  it  shall  be  the  <luty  of 
the  Secretarv   of  the  Treasury  to  set   aj.art   in  the  Treasury  a 
V,  .erve   fund"  of  one  hund.v.l  and  fifty   million   dollars    m    -old 
,„i„  ,„a  Inillion,  ^vhich  fund  shall  be  used  for  such  re.lemption 
..urnoM.s  onlv.  ami  whenever  an.l  as  often  as  any  of  said  notes 
shall  be   re.l.'emed   from   sai.i   fun.l   it    shall   be   tlie   duty   of    the 
Secretarv    of   the   Treasurv    to    um.    said    n..tes    so    re.leeme.l    to 
restore  and  maintain  such  reserve  fund  in  the  manner  followm-, 
to  wif.      First,  bv  exchanKino-  the  n<.tes   so   re.leemed    tor  any 
„ol.l  cin  in  the  general  fund  .d"  the  Treasury;  second,  t.y  ac- 
^pting  deposits  of  gold  coin  at    the   TreaM.ry   or    d    any   sub- 

541 


,f   L 


u\ 


m 


w 


1^2 


APrKNDIX 


ii-L'asury  in  exrhan-,n.  for  the  l-nilcd  States  notes  so  rcdccmcrl; 
thin/.  l,_v  pnxMirino-  ^r,,!,!  ,„i„  l,_v  the  use  of  said  noto.  ,„ 
•■tcTordancT  uith  the  provisions  of  Mctlon  thirtv-.eveii  huiuhvd 
of  the  Revised  Statute^  of  the  Tnited  States.  If  the  Seeretary 
of  tiie  TreaMii-v  is  unable  to  re>tor..  and  n,/unt,ain  the  -old  coin 
■n  the  reserve  fund  l.v  the  for.  <.,,i„o-  methods,  and  the"  amount 
cf  surh  -old  eoin  and  l)ulH<ni  in  >aid  fund  shall  at  anv  tune  fall 
'"■l.in  one  hun.lre.l  nullinn  dollars,  then  it  hall  i)e  li'is  duty  t„ 
restore  the  >anie  to  the  niaxiniuiu  sum  of  one  hundred  and  fifty 

""' '  ''""'"■^  ''.^    'u.rrounin-  money  on  the  eredit  of  the  Tnit/d 

States,  and   for  flu.  deht    thus  ineurivd  to  issue  and  sell  o.uj.on 
...•  reKistend  hnnds  „f  fhe  Tnited  States,  in  such  lorn,  as  h.  „,,,v 
presenhr.    n.    deuonunalions    of    fifty    ,loIlars    or    anv    multi,,le 
thereof.  I,..arin-  interest  at   the  rate  of  not  exceedin^r  three  per 
centum  per  annum,  paval.l..  ,,uartrrly,  sueh  honds  to  l„.  pavahle 
at   tlic   pleasure  of   the   Cnit.,!   States  after  one   year   fron,    the 
<iate  of  then-  issue,  and  to  l...  payable,  prineipal  and  interest.  i„ 
Kohl  eon,  of  the  pres.mt  stan<lar<l  value,  and  to  be  exempt  fro,,, 
the  payment  of  all  taxes  or  duti.s  of  the  United  States,  as  well 
as  from  taxation  in  any  forn,  by  or  under  State,  nnn.ieipal,  or 
''"■■■'I  aulh<n-,ty:  and  the  ;;old  eoin  ree.aved  from  th..  sale  of  said 
l)on(ls  shall  first  !„•  .•ov,  red  info  the  nv„.ral  fund  of  the  Treasury 
an.l  fher,  exchan-.d,   in   lhe  ,„,.,„„er  hereinbefore   providai.   for 
■•"1  'qnal  am.amt  of  the  notes  redeemed  an<i  held  for  cxehan<To 
an.l  the  S.rret.ry   of  the  Tnasury   n,ay,   in   his  discretion,  use 
viul  notes  ,n  exchanuv  f„,  „,,1,1.  „,  u>  pnrchase  or  redeem  any 
bonds  of  the  Tnitul  States,  or  for  any  other  lawf.d  purpose  th"e 
public  interests  may  re.iulre,  except  that  they  shall  not  lie  used 
to  meet  defici.  iieies  in  the  curivnt  revenues.      That  Tnlfed  States 
■infes   when    ivd,r„„.l    in  aceon lance  with   the   pr.n  Islo„s   „f  this 
Metion   shall  be  reissned,  but    shall   be   held   In   the   r,  m.-vc   fund 
unfil  exenano-.d  for  ^rold.  as  hnvln  provided;  and  the  onjd  ,,„„ 
'""J   i'ulhon    in    the    reserve    fund,    together   with    the    r.deemcl 
notes  held  for  use  as  provided  in  this  section,  shall  at  no  lime 
exceed  tlic  maximum  s,i,n  of  ,„,..  hnndivd  and  fiftv  .«,ni;=.M  .1.]];... 
Sec.   ;}.   '1-hat  not!,!,,,- ..mtainrd  in  this  Act  shall  1...  construed 
to  affect  the  legal  tend,  r  -,„allty  as  „„u   provide.l  by  law  of  the 


APrENDIX 


A:\ 


,,i\ir  dollar,  or  of  any   other  money   comcd   or   in.Micd  h\   the 
Initod  States, 

Si;c.  4.  That  there  be  estabhshet}  in  tlio  TnaMiry  Drpart- 
!  .  lit.  as  a  part  of  the  oftice  of  tlie  Treasurer  of  the  I'nitcd 
>t  ites,  divisions  to  be  designated  and  known  as  the  <h vision  of 
-lie  and  the  division  of  redemption,  to  which  shall  l)e  assirriutl, 
1.  -jjeetively,  under  such  re<^ulations  as  the  Secretary  of  the 
'i'reasury  may  apjirove,  all  /eeords  and  accounts  relating  \r  the 
-MIC  and  ri(lini{)tion  of  I'liiied  Stat(s  notes,  irold  irrtificatcs, 
vixcr  certificates,  and  curn  iicy  certificates.  There  shall  he 
tiansferred  from  the  accounts  of  the  <reneral  fund  of  the 
Treasurv  of  the  United  States,  and  taken  up  on  the  books  of 
-;ud  divisions,  respectively,  accounts  relating;  to  the  reserve 
fund  for  the  redemption  of  United  States  notes  and  Treasury 
iintcs,  the  <^oId  coiti  held  afraiiist  outstanding  <j;old  certificates. 
tlic  United  States  notes  held  against  outstandin^jf  currency 
1 1  rtitic'ites,  and  tiu>  silver  dollars  held  a<jfainst  out'taiulinrf  silver 
1  rtificates.  and  eacli  of  the  fun.ds  represented  by  these  accounts 
-liall  be  used  for  the  redemption  of  the  notes  and  certificates 
i'nr  which  they  arc  respectively  pledfjfed,  and  shall  be  used  for 
no  other  purpose,  the  same  hiing  held  as  trust  funds. 

Si:r.  5.  That  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasurv.  as  fast  as  standai'd  silver  dollars  are  coined  under 
t',r  provisions  of  the  Acts  of  July  fourteentli.  ei<^liteen  Innulred 
iiid  ninety,  and  June  thirteenth.  eip;hteen  hundred  and  ninety- 
<  iu;ht,  from  bullion  purcliased  under  the  Act  of  .July  fourteenth, 
eiffhteeri  hundred  and  lu'nety,  to  retire  and  cancel  an  equal 
amount  of  Treasurv  notes  wlicncver  received  into  the  Treasury, 
cither  bv  cxchanfrc  in  accordance  with  the  provisions  of  this 
Act  or  in  the  ordinarv  course  of  business,  and  upon  the  caru-ella- 
tion  of  Treasury  notes  .silver  certificates  shall  be  issued  against 
the  silver  dollars  so  coined. 

Skc.  fi.  'I'hat  the  Secretary  of  the  Treasurv  is  hereby 
authorized  and  directed  to  receive  deposits  of  fjold  coin  with  the 
'I'rrasnrer  or  anv  assistant  treasurer  of  the  T^nitefl  St.ates  in  stuns 
i)f  not  less  tlian  twenty  dollars,  and  to  issue  <rold  ci  rtificati  s 
therefor  in  denominations  of  not   less  than  twentv  dollars,  and 


i 


5H 


APPENDIX 


tlic  coin  so  flcpositcd  sliall  be  ntaiiR'ti  in  tlic  Treasury  and  hrlt 
for  tliL>  payment  of  such  certificates  on  lieniand,  and  used  foi 
no  otiier  purjiose.  Such  certificates  shall  be  receivable  for  cus 
tonis,  taxes,  and  all  public  dues,  and  when  so  received  may  !)( 
reissued,  and  when  held  by  any  national  banking  associatioi 
may  be  counted  as  a  {)art  of  its  lawful  reserve:  Prozidcd,  Thai 
wheneyer  and  so  long  as  the  gold  coin  held  in  the  reserve  fuiu 
ill  the  Treasury  for  the  redemption  of  United  States  notes  aiK 
Treasury  notes  shall  fall  and  remain  below  one  hundred  millior 
dollars  the  authority  to  issue  certificates  as  herein  provided  shal 
be  >u-i)ended:  And  provided  further.  That  whenever  and  s( 
long  as  the  aggregate  amount  of  United  States  notes  and  silver 
certificates  in  the  general  fund  of  the  Treasury  shall  .xcced  sixty 
million  dollars  the  Secixtary  of  the  Treasury  may,  in  his  dis- 
cn  tion.  suspend  the  issue  of  the  certificates  herein  provided  for: 
J)i(l  jinnidid  further.  That  of  the  amount  of  such  outstanding 
certificates  one -fourth  at  least  shall  be  in  denominations  of  fiftv 
dollars  or  less:  And  provided  further.  That  the  Secretary  of 
tile  Treasury  may,  in  his  discretion,  issue  such  certificates  in 
denominations  of  ten  thousand  dollars,  payable  to  order.  And 
section  fifty-one  hundred  and  ninety-three  of  the  Revised 
Statutes  of  the  United  States  is  hereby  repealed. 

Si-:c.  7.  That  hereafter  silver  certificates  shall  be  issued  only 
of  denominations  of  ten  dollars  and  under,  except  that  not  ex- 
ceeding in  the  aggregate  ten  per  centum  of  the  total  volume  of 
said  certificates,  in  the  discretion  of  the  Secretary  of  the 
'J'reasury,  may  be  issued  In  denominations  of  twenty  dollars, 
fifty  dollars,  and  one  hundred  dollars;  and  silver  certificates  of 
higher  denomination  than  ten  dollars,  except  as  herein  provided. 
shall,  whenever  received  at  the  Treasury  or  redeemed,  I)e  retired 
and  canceled,  and  certificates  of  denominations  of  ten  dollars  or 
less  shall  be  substituted  therefor,  and  after  such  substitution, 
in  whole  or  in  ])art,  a  like  volume  of  United  States  notes  of 
less  denomination  th;ui  ten  dollars  shall  from  time  to  time  be 
retired  ;uid  canceled,  and  notes  of  deiiominafinn«:  of  f.jn  dnllnrs 
and  upward  shall  be  reissued  in  siib4ituti(ni  therefor,  with  like 
qualities  and  restrictions  as  tlio^e  retired  and  canceled. 


APPENDIX 


545 


y  and  hrlri 
1  used  for 
lo  for  cu>- 
.'d  may  I)r 
issoc'iatioii 
id  1(1,  Til, it 
■-erve  fund 
notes  aiiil 
'ed  million 
kided  shall 
cr  and  x) 
and  silver 
cced  sixty 
n  liis  dis- 
vidod  for: 
itstandinrj 
IS  of  fifty 
'rotary  of 
ificatcs  in 
icr.  And 
!    Revised 

sued  only 
it  not  cx- 
rolninc  of 
y  of  the 
V  dollars, 
ificatcs  of 
provided, 
be  retired 
dollars  or 
)stitution. 
notes  of 
)   time  he 

■  n    floll.ir^ 

with  like 


Skc.  8.  That    the    Secretary    of    the    Treasury    is  •.:y 

authorized  to  use.  at  his  discretion,  any  silver  bullion  :ii  tiie 
Treasury  of  the  United  States  purchased  under  the  Act  of  Ju'y 
fourteenth,  ein;liteen  hundred  and  ninety,  for  coinage  into  such 
drnominations  of  subsidiary  silver  coin  as  mav  be  necessary  to 
nut  t  the  })ublic  reciuircments  for  such  coin :  Proxahd,  That 
the  amount  of  subsidiary  silver  coin  outstanding  shall  not  at  any 
time  exceed  in  tl;e  aggregate  one  hundred  miliions  of  dollars. 
Whenever  any  silver  bullion  purchased  under  the  Act  of  duly 
fourteenth  eighteen  hundred  anil  ninety,  shall  be  used  in  the 
coinaiie  of  subsidiary  silver  c(;in.  an  .unouiit  of  Treasury  notes 
issued  under  said  Act  equal  to  the  cost  of  the  bullion  contained 
in  such  coin  shall  be  canceled  and  not  reissued. 

Set.  9.  'I'hat  the  Secretary  of  the  Treasury  is  hereby  author- 
i/,'d  and  directed  to  cause  all  worn  and  uncurrent  subsidiary 
Mlver  coin  of  the  T'nited  States  now  in  the  Treasury,  and  here- 
ifter  received,  to  be  recoined,  and  to  reimburse  the  Treasurer 
of  the  United  States  for  the  difference  lietween  the  nominal  or 
face  yalue  of  such  coin  and  the  amount  the  same  will  produce 
in  new  coin  from  any  moneys  in  the  Treasury  not  otherwise 
appropriated. 

Skc.  10.  That  section  fifty-ono  hundred  and  thirty  eight  of 
tlie  Revised  Statutes  is  liereby  amended  so  as  to  read  as  fol- 
lows: 

"Section  51138.  No  association  shall  be  organized  with  a  less 
(Mj)ital  than  one  Inmdred  thousand  dollars,  except  that  banks 
with  a  capital  of  not  less  than  tir'ty  thousatid  dollars  may,  with 
the  approval  of  the  Secretary  of  the  Treasury,  be  organized  in 
any  place  the  population  of  which  does  not  exceed  six  thousand 
inhabitants,  and  except  that  banks  with  a  capital  of  not  less 
than  twenty-five  thousand  dollars  may.  with  the  sanction  of  the 
Secretary  of  the  Treasury,  be  organiz-d  in  any  place  the 
population  of  which  does  not  exceed  thn'e  thousand  inhabitants. 
No  association   shall  be   organize.l   in   a  city   the   i)o})iilati()n   of 


;ti. 


..If.J    ,,f    less    ill! 


,  .  ,               1     <■  .'1      1 1           .1 
^llilli   cXCCCuS   111..    .!..•.. 

two  hundred  thousand  doUa'-s." 

Sec:.   11.  That    the    Secretary    of    the    Treasury    is    liercby 

C— VII— ;)4 


546 


APPENDIX 


h  ■. 


I*  :,--• 


authorized  to  receive  at  the  Treasury  any  of  the  outstanding 
l^onds  of  the  United  States  bearin^r  interest  at  five  per  centur, 
I.cr  annun.,  payable  February  first,  nineteen  hundred  and  four 
■■UHl   any    l)„nds   of  tlic   United   States   hearincr  interest   at   fuu, 
].er  centum  per  annum,  payable  July  first,  nineteen  hundred  arR 
seven,  and  any  bon.ls  of  the  United  States  bearin^r  interest  al 
three    per   eentun,    per   annum,    i.ayable   August    Hrst,    nineteen 
hundred  and  ei^ht,  and  to  issue  in  exchange  therefor  an  e,,ual 
amount  of  coupon  or  registere.i  bonds  of  the  United  States  ,n 
•such  form  as  he  may  prescribe,  in  denonnnations  of  fiftv  .lollars 
or   any    multiple   thereof,   bearin-    interest   at    the    rate'  of   two 
per   centum    per  annun.,    payable   (p.arterly,   such    bon.ls    to    ho 
payable  at  the  pleasure  of  the  United  States  after  thirty   vears 
from   the   date   of  their   issue,   an.i    sai.l   bonds   to    be    pavablr 
principal  and  interest,  i„  gohj  coin  of  the  present  standard  'value,' 
and  to  be  exempt  from  the  p;    um.i  of  all  taxes  or  (hities  of  the 
United    States,    as   well    as    from    taxatior    in    any    form    by    or 
under    State,    inunicij)a],    or    local    authority:      Pnnidrd,    That 
such  outstanding  bonds  r  ay  '  r  received  in  exchange  at  a' valuii- 
tion  not  greater  tiian  their  present  worth  to  yield  an  income  oC 
two  and  one-,,uarter  per  centum  ])er  annum:  and  in  considera- 
tion  of  the  reduction   of   interest   .tfccted,  the    Secretary   of  tlir 
Treasury  is  authorize.l  t.,  pay  to  the  holders  of  the  out'standin.- 
honds    surrendered    for    exchange,    out    of    any    monrv    in    the 
Tr.'asury  not   otherwise  appropriated,  a  sum   not   greater  than 
the  .l.tf.rence  between  their  present  worth,  computed  as  afore- 
said, and  th.  ir  j.ar  value,  and  tlie   paynu  .,ts   to  be  made  here- 
un.l.  r  shall  be  laid  to  be  payments  on   account  of  the  sinking 
fund   create.!  by  section   fhirty-s.x   hundred  ami   nlnetv four  of 
the    K.  vised    Statutes:      ./,-„/    prmhlrd    f„rfh,r.    That"   the    two 
per  centum  bonds  to  be  issmH  ,nu|e,   fbc  provisions  of  this  Act 
sliall  he  issued  at   not  l.-ss  than  par.  an.J  thev  si,,!!  be  numbere.l 
consecutiv.lv    i„    tl,e  or.ler  .,f  their  iss,,..   ,,,,1   „  ),,„    ,,,v„,ent    is 
made  the  last   numbers   i.^ied  shall  be  first   paid,  an,)  thi,  or.fer 
shall    be    follnveed    uniil    all    the    b.m.k    are    paid,    and    uhe„ever 

'"  ■ ''    ■■■■••"••-="""^^   r,.-,,,n.>  ai.-  (aii((i  for   payment    interest 

tlureon   shall   cea^e  thrc   m.-ntli-    after  such   call":  and   there   Is 


ArrENDix 


5« 


utstanding 
XT  centum 

and  four, 
^>t  at  i'owr 
iiulrcd  atid 
interest  at 
,  nineteen 
'  an  e(jual 

States  in 
'ty  dollars 
te  of  two 
nds  to  he 
irty  years 

payable, 
ard  value, 
ies  of  the 
in  by  or 
>d.    That 

a  valua- 
nconie  of 
oiisidera- 
■y  of  the 
standini^ 
r  in  the 
ter  than 
ts  al'on - 
de  }i(Te 

sinking 

four  of 
the  f«() 
this  Ac\ 
UtTihered 

rnent  i^ 
IS  order 
heiicver 
mterisl 
lliere   is 


lureln'  apjjropriated  out  of  any  money  in  the  Treasury  nut 
dtlierwis"  appropriated,  to  etfeet  tiie  exchanges  of  bonds  pro- 
Miliil  for  in  this  Act,  a  sum  not  e\eeedin<r  (jne-fiftcenth  of  one 
per  centum  of  the  face  value  of  said  bonds,  to  pay  the  expense 
dt  prej)ari!i^  and  issuin<j;-  the  same  and  other  expenses  incident 
thi  rt'to. 

Skc.  ly.  'I'hat  upon  the  deposit  with  the  Treasurer  of  tlie 
I'lilted  States,  l)y  any  national  banking'  association,  of  anv 
Imnds  of  the  I'nitid  States  in  the  manner  prinided  by  existiiifr 
l.m,  such  association  sh.ail  be  entitled  to  nctive  from  the  C'omp- 
iinjlei  of  the  C'urnncy  circulating-  notes  in  blank,  registered 
and  countersitrned  as  provided  by  law,  ecjual  in  amount  to  the 
ir  \alue  of  the  bonds  so  deposited ;  and  any  national  liankin^  as- 

ciation  now  ha\  ni^  bond>  on  deposit  foi-  the  security  of  circu 
latiiifj;  notes,  anil  upon  which  an  amount  of  circulating  notes  has 
hreii  issued  less  than  the  ])ar  value  of  the  bonds,  shall  be  entitled, 
upon  due  apjilication  to  the  Comptroller  of  the  Currency,  to 
nceivc  additional  circulatinj^f  notes  in  blank  to  an  amount  which 
\u]\  increase  the  circulating  notes  held  b\  such  association  to 
the  [)ar  value  of  the  bonds  deposited,  such  additional  notes  to 
he  held  and  treated  in  the  same  way  as  circulat  Ini^  notes  of 
national  banking;'  associations  Ik  relof'r)re  i-sued,  and  subject  to 
ill  the  ])ro\isi(Uis  of  law  aff'ectin;^'  such  notes:  /'/or/f/ci/,  'I'hat 
iiothinfX  lurein  lontaimd  shall  be  construed  to  modi("\  or  I'epeal 
ihe  provisions  of  section  tift\-one  hundred  and  si\tv  sexcn  of 
the  Uevisid  statutes  of  the  I'nited  states,  auth.iri/iii;^-  the 
(Omptroller  of  the  ('iirrencv  to  nijulre  ailditional  dejiosits  of 
bunds  or  of  lawful  money  in  case  the  market  \alu(  of  tlu  Ixiiids 
h(  Id  to  sicure  tli(  ciiculatmj;  notes  shall  fall  below  the  par 
\ahii'  (d'  the  cir(  lilat  iii^  notes  outstanding-  for  which  soi'h  lion<ls 
may  be  deposited  as  securitv  :  .ind  proiiilii/  fiirllur.  'I'hat  the 
circulating  notes  furnishi,}  !'■  national  banking  associations 
unik  r  the  pio\isions  of  this  Act  shall  be  of  the  denominations 
prescribed  by  law.  excej)t  that  no  naticm.il  liankliifr  association 
^halL  •ift''r  tlie  P'lssnnc  (if  tjiw  .\et^  lie  intitli'i!  to  receive  fron.' 
the  Comptroller  of  the  Currency,  m"  to  issue  or  reissue  or  place 
in  circulation,  more  than  one-third  in  amount  (d"  its  circulating 


III 


548 


ArPENDIX 


.% 


"ot.s  of  the  cknominati,,,!  of  Hve  .loUars :     A„d  provide -^  fu 

tlur,   That   the  total   amount   of  such   notes   issue,)  to  any   su 

association    may    equal    at    ..ny    time    hut    shall    not    exceed    t 

■•'■"ount    at    such    t,.Me    of    its    capital    stock    acfially    paid    i 

And  provided  further.  That  u,)d..r  regulations  to  l,e'  prescrih. 

In  the  Secretary  of  the  Treasury  any  national  hanking  a.soci 

t'«.n  „,ay  substitute  the  two  p..,-  eentum  hon.ls  issued  under  tl 

I.n.v,s,ons  of  this  Act   for  a,.y  of  the  hon.ls  deposited  with  tl 

ireasurer  to  secure  circ'ulation   or  to  secure  ,l,.posit5  of  p„|,I 

money;   and   so   ,nuch    of  an    Act    entitK.I    "A,,   Act    to   enal) 

national  hanking  associations  to  extend  their  corporate  cxistenn 

and    for    other    purposes,"    approved    duly     t«,.|fth,    ei-rhtee 

''^"•''■•'■•l  ••hhI  eighty-fwo.  as  prohihits  anv  national  hank  whic 

makes   any   deposit   of   lawful   nmncv    in    order  to   withdraw   it 

c.rc,datu,g  notes  from  re  niving  any  increase  of  its  circulatiu 

for  the  prnod  of  six  months  from  the  tin>e  it  ,na<l,.  such  .ieposi 

nt   lawful  m.Micy   for  the  purj.ose  aforesaid,  is  herehv  roneale.l 

••"'<l  ■•'II  other  Acts  or  ,,arts  of  Acts   inconsistent  with  the  pro 

Visions  nf    this  section  are  h.  rehy   ivpealrd. 

Si:<-.  v.).  'I-hat  every  nati.u.ai  hanking  association  having,,, 
deposit,  as  provided  hy  law,  ho„,|s  of  the  T'nit..d  States  hearinn 
."teres!  at  the  rate  of  two  per  o„fum  per  annum,  issue,!  und.^ 
fl'<'  [.roMsHms  of  this  A,'t,  to  se.ure  its  cir,-ulating  notes,  shall 
pay  to  the  Treasurer  of  the  I'mted  Stat.^s,  i„  the  im.nths  ot 
•'■■'"uary  and  duly,  a  tax  of  on..-f„„rth  of  one  per  c.ntum  v.u-h 
I'aH  year  upon  the  average  amount  of  such  .d'  its  notes  i,, 
;•■'•<•"'■■''"'-.  as  an.  has.d  upon  the  .ieposit  of  sai.l  two  p..-  ....ntum 
l-n-l^:  and  such  taxes  shall  he  in  li.u  of  existing  faxes  ,m  its 
nn.es  ,n  eirculatinu  i„,,,os.,i  1,,.  ,,.ction  fifty-two  hun.Ire,!  and 
foiM-teen  of  till    I{e\is, ,}  Statutes. 

Skc.  1  k  That  the  provisions  of  this  A.^t  are  not  inten,led  to 
I're,-h,.le  the  a.vomplishment  of  inl,r„,.,tinnal  hmutalhsm  when- 
ever conditions  shall  make  it  .xpe.lient  and  pra..fical.le  to  s,aM.re 
Mu>s«„,ohv  n.ncurnnt  action  of  the  lea.hng  comnuTcial  nations 
of  the  «orld  an. I  at  a  r/dN.  uhlel,  shall  insure 
relali\e  xalue  I.etue.n  oold  and  siKcr. 
Appro\.d.   .Aiareh    I  V.    VMM). 


'•omW/'/  fur- 

0  any  sudi 
exccet!    the 

y  paid  in: 
;  prL'scribod 
ing  a...-,oci,i- 

1  under  the 
t'd  with  tiir 
'  "f"  l)ul)li<' 
;  to  onahiu 
c  cxisti'iicc. 
I,  ciffhtcrll 
Jaiik  wliich 
itlidraw  its 
(circulation 

K'll    <ll■pt)^it 

V  r.^ncaKd. 
Ii  the  pro- 

lia\  ing  on 
IS  hearing 
lied  under 
"tes,  shall 
nonths  oi 
ituin  each 
notes  in 
L>r  cenhni! 
tcs  on  its 
idred  and 

tended  to 
>u\  when- 
to  securr 

d  nations 
Ti t III jxt  .t r 


APPKNDIX  II 
FEDERAL    RESERVE   ACT 

An  Act  to  provide  for  the  cstablislimeiit  of  Federal  reserve  banks,  to 
li.riii^li  an  elastic  currency,  to  att'ord  means  of  rediscountin^  coniiiier<ial 
|M|  (  r.  to  establish  a  more  etTective  sui)crvision  of  banking  in  the  United 
Mitts,  and  for  other  ])ur])oses. 

Br  it  enacted  hif  the  Senate  and  House  of  Representatives  of 
the  I'nited  States  of  Amerien  in  Congress  assembled.  That  the 
^hort  tith:  of  this  Act  shall  l)e  the  "  Federal  Reserve  Act." 

Wherever  tlie  word  "  hank  "  is  used  in  this  Act,  the  word 
-liill  he  held  to  include  State  hank,  hanking  association,  and 
trust  conipanv,  except  where  national  hanks  or  Federal  reserve 
hanks  are  specifically  refi'rred  to. 

The  terms  "  national  hank  "  and  "  national  banking  associa- 
tion"' used  in  this  Act  shall  he  held  to  he  synonymous  and 
intcrchangeahle.  The  term  "  meml)cr  hank  "  shall  he  held  to 
mean  any  national  hank.  State  hank  or  trust  compaii  wliich 
h  IS  hecome  a  memher  of  one  of  the  reserve  !)anks  created  hy  this 
Alt.  The  term  "hoard"  shall  he  held  to  nie.m  Federal  Ue- 
>!  rve  Hoard;  the  term  "  district  "  shall  he  held  to  mean  Federal 
II  serve  district;  the  term  '*  rescne  bank"  shall  he  liekl  to 
HP  an  Federal  reserve  hank. 

Kl'.DKK  \I.   KKSKRV!'.   DISTIUCTS. 

Skc.  2.    As  soon   as  practicable,  the  St cretary  of  tlio  'I'reas- 
'V,  the  Secretary  of  Agriiulture  and   the  ('omplroliir  of  the 

•  iirrencv,  Jicting  as  "The  l{estM-ve  Hank  Organl/ation  ("om- 
niittec,"  shall  designate  not  hss  than  eight  nor  more  than  twihe 
cities  to  be  known  as  T'ederal  reserve  cities,  and  shall  dixlde  the 
eontinrntal  I'nited  States,  excluding  .Alaska,  into  districts,  each 

•  hstrict  to  contain  btdy  one  of  such  I'ediral  reserve  cities.  The 
determination  of  s.ild  orgatii/at ion  conmiiHee  shall   not   be  suli- 

■  ct    to    review   except   by   the   I'ederal   Ueserve    Hoard   when   or- 

£49 


§1 


!l 


w- 


.5)0 


APPENDIX 


ffan.zcl:  rrovulcch  Tl.ut  the  districts  shall  l.e  apportioned  wifch 
due  rc^^ird  to  tlie  coi.veiii.ncc  and  customary  course  of  business 
and  sliall  not  necessarily  be  coterminous  with  any  State  or 
States.  The  districts  thus  created  may  be  readjusted  and  new 
districts  may  from  time  to  time  be  created  by  the  Federal  Re- 
serve Board,  not  to  exceed  twelve  in  all.  Such  districts  shall 
be  known  as  Federal  reserve  <listricts  and  may  be  designated  by 
number.  A  majority  ,,f  the  organization  committee  shall  con'- 
stitute  a  quorum  with  authority  to  act. 

Said  organization   committee  shall  be  authorized  to  employ 
eoun.el  and  expert  aul,  to  take  testimony,  to  send  for  person's 
■t.id  j)apers,  to  administer  oaths,  and  to  make  such   investhra- 
tion  as  may  be  deemed  necessary  by  the  said  committee  in  de- 
termining   the    reserve    .ll.irlcts    and    in    designating   the    cities 
withm  such  districts  when-  such  Federal  reserve  banks  shall  be 
severally   loc.'.ted.      The  said  cnunlttee  shall  supervise   the  or- 
gan,/at  ion  in  each  of  the  cities  designated  of  a  Federal  reserve 
I'ank,    uhich    shall    Inclu.le    In    Its    title   the   name   of   the   city    I„ 
Avh.ch  it    is   situate,!,   as   "  Fe.leral    Heseive    Hank   of  Chlca'-ro  "' 
Tnder  regulation,  t,,  be  prescribed  by  the  organizati.ni  c"om- 
I'iittee,  every  national   banking  association   in  the  Fnlt^d  States 
1^  licreby  requlre.l,  an.i  every  eligible  bank   In   the  United  States 
and   every    trust    conij.any    within    the    District   of   Columbia,    Is 
iHMvby  authorized  to  signify  in  writing,  within  sixiv  davs  after 
the   passage  of  this   Act.   Its  acceptance  of  the   terms   and   pn- 
MMons    heivnf.      When    the    organization    cmmittee   shall    have 
(l.Mgnate,!   the  eiths   in    uhlch    Federal    res,.rve  banks   an     to   be 
organ, /,d.    an.i    tix,  d    the    geographical    limits    of    the    Federal 
reserve  .l,^t^I<•ts,  vx.yy  national  banking  association  uithln  that 
.l->lr,rt    .hall   be  required   uifhln   thirty  .lav.  after  noil....   fr.,m 
♦li"  organization   committee,   to  subscribe    to   the  capital    stock 
of  .such  Federal  res,.rve  ba.ik  in  a  sum  e.,ual  t.,  six  per  centum 
of  the  paid-up  .apltal  .to.  k  and  sur,,Ins  of  such  bank,  one-sixth 
<-f  the   subscription    to   be    payabl,.  on    call    of    th.   organization 
'•;"""""'"   "••    "'■   '1'^'    I-'*'"-''!    H'— -v..    Hoard,    .n..-slxth    within 
-H.,,.    „„,nii,s    an.i  one-sixtl,   ,,,thln    six    months    thereaft-r,    and 
tlie  remain.ler  of  the  subscription,  or  any  [..it  thercf,  shall  be 


APPENDIX 


Miliiict  to  call  when  deemed  necessary  by  tlie  Federal  Reserve 
liuiird,  said  paymeiils  to  be  in  ^old  or  <^old  certificates. 

The  shareholders  of  every  Federal  reserve  hank  shall  he  hild 
iiuiividually  responsihle,  equally  and  ratably,  and  not  one  for 
aiiotlier.  for  all  contracts,  debts,  and  ensas^^nients  of  such  bank 
t,i  the  extent  of  the  amount  of  their  subscriptions  to  such  stock 
;it  the  par  value  thereof  in  addition  to  the  amount  subscribed, 
wliether  such  subscriptions  have  been  paid  up  in  whole  or  in 
part,  inider  the  provisions  of  this  Act. 

Any  national  bank  failing  to  si<,niify  its  acceptance  of  the 
terms  of  this  Act  within  the  sixty  days  aforesaid,  shall  cease  to 
ait  as  a  reserve  a<?ent,  ujjon  thirty  days'  notice,  to  be  <riven 
within  the  discretion  of  the  said  organization  committee  or  of 
the  Federal  Reserve  Board. 

Should  any  national  banking  association  in  the  United  States 
liow  organized  fail  within  one  year  after  the  passage  of  this  Act 
to  become  a  member  bank  or  fail  to  comply  with  any  of  the 
iirovisions  of  this  Act  applicable  thereto,  all  of  the  rights, 
privileges,  and  franchises  of  such  association  grant.'d  to  it 
under  the  national-bank  Act,  or  under  the  provisions  of  this 
Act,  shall  be  thereby  forfeited.  Any  noncompliance  with  or 
violation  of  this  Act  shall,  howe\er,  be  determined  and  adjudged 
l)V  anv  ccnirt  of  the  I'nited  States  of  competent  jurisdiction  in 
a  suit  brought  for  tliat  purpose  in  the  district  or  territory  In 
which  such  bank  Is  located,  under  direction  of  the  Federal  Re- 
serve Board,  by  tlie  Comptroller  of  the  Currency  ii.  his  own 
name  before  the  association  shall  be  declared  dissolved.  In 
cases  of  such  noncompliance  or  violation,  other  than  the  failure 
to  become  a  member  bank  under  the  provisions  of  this  Act, 
rvcrv  director  who  participated  in  or  assented  to  the  same  shall 
he  held  liable  In  his  personal  or  individual  capacity  for  all 
<lani.'icrt.s  whi<'h  said  bank,  it-  shareholdiTs.  or  any  other  })erson 
shall  have  sustained  In  consequence  of  such  violation. 

Such  dissr)lution  shall  not  take  away  or  impair  any  remedy 
.  -„:.,-i   =.;..!..  ...............  I  ;-....•     •f'-:  Kt/^.i-Lliotil'Ts  (>r  offi'^crs^   for  nnv 

,;^;;::;-;        ■:■.::    ■■■:  j  ■••:    r  ■■•••■- . 

liability  or  penalt\  which  shall  Iiave  been  previously  inc-irred. 
Should  the  subscriptions  by  banks  to  the  stock  of  said  Fi.leral 


552 


APPENDIX 


m\ 


reserve  banks  or  any  one  or  more  of  them  be,  in  the  ju,Ig,„ent 
oi  the  or^ran.zation  co.n.nittee,  insufticic.nt  to  provide  tlie  amount 
of  capital  rc.i„ire,l  therefor,  then  and  in  Ihat  event  the  sai.l 
organization  committee  may,  under  conditions  and  regulations  to 
he  prescribed  by  it,  offer  to  public  subscription  at  par  such  an 
.m>ount  of  stock  in  said  Federal  reserve  banks,  or  any  one  or 
^■H.re  of  them,  as  sai.l  committee  shall  determine,  subje'ct  to  the 
same  conditions  as  to  payment  and  stock  liability  as  provided 
lor  member  banks. 

No  individual,  copartnership,  or  corporation  other  than  a 
"'-"'';•••  >;""1^  of  it.  .hstrict  shall  be  permitte.l  to  subscribe  for 
or  to  hold  at  any  tim..  more  than  $i>r,.()()()  p^u-  value  of  the  stock 
'"  any  F,,|eral  reserve  bank.  Such  stock  shall  be  known  as 
pubhc  stock  and  may  be  transferred  on  the  books  of  the  Federd 
reserve  bank  by  the  chairman  of  the  board  of  directors  of  such 
bank. 

Shoul.l  the  total  subscriptions  by  banks  and  the  public  to  the 

stock  o    said  r-ederal  reserve  banks,  or  any  one  or  more  of  thenK 

-e,  m  the  judgment  of  the  organization  committee,  insufficient 

o  provule  the  amount  of  capital  required  therefor,  then  and  in 

hat   event    the  said   organizati.,n    committee   shall   allot    to    the 

n,  .d  States  such  an  amount  of  said  stock  as  said  committee 

shall  .letenmne.      Said  rnifcl  States  stock  shall  be  paid  for  at 

par  out  of  any  ,„„„,,  ,•„  ,„,  Treasury  not  otherwise  appropri- 

aU.,  and  sail  be  held  by  the  Secretary  of  tl.TreasurvLl 
d  sposed  of  for  the  benefit  of  the  T'nited  States  i„  ..ch  „,;„„..•, 
at  such  nnes  and  at  su.h  price,  not  less  than  par.  as  the  Secre- 
tary of  the    Fivasury  shall  determine. 

St.ck  not  held  by  member  banks  shall  not  be  entitle.]  to  votiW 
power.  " 

The  Federal  Reserve  Roard  is  hereby  en,p,n  ered  to  adopt 
and  promulgate  rules  an.l  regulations  governing  the  transfers 
or  said  stock. 

No  Federal  reserve  bank  shall  commence  business  with  a  sub- 
scribed capital   l.ss   than   .«  KOOO.OOO       '|-| :,...:_..      , 

serve  districts  and   Fc.leral  reserve  cities  shall  not'l^^in^tnu'cl 
as    changing   the   pres..nt    status   ,.f   reserve   cities    ami   central 


APPENDIX 


r).y.] 


r,  ~,rve  cities,  except  in  so  fur  iis  this  Act  cliiuist'^  tlie  amount 
of  reservfs  tiiat  may  be  carried  with  approved  reserve  a<rents 
located  therein.  The  organization  cosnmittee  sliall  have  power 
to  appoint  sucli  assistants  and  incur  such  expenses  in  carrying 
out  the  provisions  of  this  Act  as  it  sliall  deem  necessary,  and 
maIi  expenses  shall  be  payable  by  tiie  Treasurer  of  the  I'nited 
States  upon  voucher  approved  by  the  Secretary  of  the  Treas- 
mv,  and  the  sum  of  $100,()()(),  or  so  much  thereof  as  may  be 
luicssarv,  is  herei)y  appropriated,  out  of  any  moneys  in  the 
Treasury  not  otherwise  appropriated,  for  tiie  payment  of  such 
expenses. 


t 


BRAKCH     OFFICES. 

Si;c.  3.  Each  Federal  reserve  bank  shall  establish  branch 
hanks  within  the  Feder.al  reserve  district  in  which  it  is  located 
and  may  do  so  in  the  district  of  any  FecUral  reserve  bank  which 
may  have  been  suspended.  Such  branches  shall  be  operated  by 
a  board  of  directors  under  rules  and  re<vulations  apj)roved  by 
the  Federal  Reserve  Board.  Directors  of  branch  banks  shall 
j)ossess  the  same  qualifications  as  directors  of  the  Federal  '-e- 
scrve  banks.  Four  of  said  directors  shall  be  selected  by  the 
r(-^erve  bank  and  three  i)y  tlu'  Federal  Reserve  Hoard,  and  they 
.-iiall  hold  office  during  the  pleasure,  respectively,  of  the  parent 
bank  and  the  Fed>ral  Reserve  Hoard.  The  reserve  bunk  shall 
designate  one  of  the  directors  as  manager. 


FKDKKAl,     UlSKKVl'.     HWKS. 

Sf.c.  4.  \Vhei>  the  organization  committee  shall  have  estab- 
lish' li  Federal  resirve  districts  as  jjrovided  in  section  two  of  this 
Act.  a  certificate  shaH  be  tiled  with  the  ("omptroller  of  the 
Currencv  showing  the  geographical  limits  of  such  districts 
and  the  Fedi  ral  reserve  city  designateil  in  each  of  such  di-tricts. 
The  Comptroller  of  the   Currency   shall  fhennipon   cause  to  be 


.i: 1   1. 


,>i     I, 


..i..,l 


1.  .];.)•-;,')    .■•..) 


to  such  other  banks  (Kclared  to  be  eligii)le  by  the  organization 
connnittee  which   may   apply  therefor,  an  application  blank  in 


554 


APPFA'DIX 


:^'4 


Fr 


^.^heii  Hie  minimum  amount  of  caxAi'i]  ^frwl-   ^  -i     ,  , 

"'.■»  A-  f„.  .„„  „,.,.,„„„„„  „,  ,,„;f"!i:'  tr I'* , ;,', 

;"-'7°  '■'■  -"-'l  "".  <l.o  cit,.  a„,i  S„a,.  i„  ,„,;,,,  ,,,;:;  t  to 

res  m  ,,.„  ,,,  ,„  ,.  ,„,  ,|,,„,«..|vo,  „f  ,|,,  „dva„t„sos  of  tl,|.  Act 

"...ph-oll,.,.  „n,„.  ,•„,..„„,,  ,vl,„  »|,„„  «,e,  „co,.d  „„d     J 

•"  Mu-h  or^.unxafion  certificate.,  sl,all  l.ave  noue.-  '^"'^""^'^'^ 
i  i«>i.    lo  a(l„,,t  and  use  a  corporate  seal 
Second.   To  lu.ve   .ucce.sion    for  .   period   ,r  t.entv    ^ea^. 


APPENDIX 


.).).> 


■Inch  hlaiik 
1  of  diroc- 
lorlziiig  a 
«-^i've  bank 
provisions 

cribcd  hy 
Junk  shall 
committee 
ions  liave 
tion,   and 
'uls,  make 
state    the 
■lit  of  the 
'I've  bank 
unk  is  to 
nnber   of 
phice  of 
-',  and  of 
of  such 
ribed  by 
)le  those 
ribed  or 
Federal 
Iiis  Act. 
I^fed  be- 
lie ;  and 
uthenti- 
I  to  the 
d  care- 

r  of  the 
mil  be- 
i^nated 


Vears 


from  its  organization  unless  It  "is  sooner  dissolved  by  an  Act  of 
Congress,  or  unless  its  franchise  becomes  forfeited  by  some 
violation  of  law. 

Third.   To  make  contracts. 

Fourth.  To  sue  and  be  sued,  complain  and  defend,  In  any 
court  of  law  or  equity. 

Fifth.  To  appoint  by  its  board  of  directors,  such  officers  and 
•uij)loyees  as  are  not  otherwise  provided  for  in  this  Act,  to 
(liHne  their  duties,  requiie  bonds  of  them  and  fix  the  penalty 
tliereof,  and  to  dismiss  at  pleasure  such  officers  or  em})Ioyees. 

Sixth.  To  prescribe  by  its  board  of  directors,  by-laws  not  in- 
consistent with  law,  rcgulatin<:f  the  manner  in  which  its  general 
business  may  be  conducted,  and  the  privileges  granted  to  it  by 
law  may  be  exercised  and  enjoyed. 

Seventh.  To  exercise  by  its  board  of  directors,  or  duly  au- 
thorized officers  or  agents,  all  powers  sjxclfically  granted  by 
the  provisions  of  this  Act  and  such  inci<)ental  powers  as  shall 
l)e  necessary  to  carry  on  the  business  of  banking  within  the 
limitations  prescril)ed  by  this  Act. 

Eighth.  Upon  deposit  with  the  Treasurer  of  the  United 
States  of  any  bonds  of  the  United  States  in  the  manner  pro- 
vided by  existing  law  relating  to  national  banks,  to  receive 
from  'he  Comptroller  of  the  Currency  circulating  notes  in  blank, 
registere<l  and  countersigned  as  provided  by  law,  equal  in 
amount  to  the  par  value  of  the  bonds  so  deposited,  such  notes 
to  be  issued  under  the  same  conditions  and  provisions  of  law  as 
relate  to  the  Issue  of  circulating  iu)tes  of  national  i)anks  secured 
by  bonds  of  the  United  States  bearing  the  circuhiting  })rivllege, 
except  that  the  i.  sue  of  such  notes  shall  not  be  limited  to  the 
capital  stock  of  such  Federal  reserve  bank. 

But  no  Federal  reserve  bank  shall  transact  any  business  ex- 
cept .such  as  is  incidental  and  necessarily  preliminary  to  Its 
organization  until  it  has  been  authorized  by  the  Comptroller  of 

the   Currency    to   commence   business   under   the    provisions    of 
J.I.:,.   A  _i 


t 


Every    Federal    reserve  bank    shall    be    conducted    under   the 
supervision  and  control  of  a  board  of  directors. 


r>.;6 


APPENDIX 


r, 

I: 


Tlio  hoard  of  directors  shall  perform  the  duties  usually  up- 
pertaiiiiii<^r  to  the  office  of  directors  of  hanking  associations  and 
all  such  duties  as  are  prescrihed  hy  law. 

Said  board  shall  administer  the  affairs  of  said  bank  fairly  and 
impartialiv  and  without  discrimination  in  favor  of  or  against 
any  member  l)aiik  or  banks  and  shall,  subject  to  the  provisions 
of  law  and  the  orders  of  the  Federal  Reserve  Board,  extend  to 
each  member  bank  such  discounts,  advancements  and  acconuno- 
dations  as  may  he  safely  and  reasonably  made  with  due  regard 
for  the  claims  and  demands  of  other  member  banks. 

Such  hoard  of  directors  shall  be  selected  as  hereinafter  speci- 
fied and  shall  consist  of  nine  members,  holding  office  for  three 
y»ars,  and  divided  into  tliree  classes,  designated  as  classes 
A,  1}  and  C. 

Class  A  shall  consist  of  three  members,  who  shall  be  chosen 
by  and  be  representative  of  the  stock-holding  banks. 

Class  H  shall  consist  of  three  members,  who  at  the  time  of 
their  election  shall  be  actively  engaged  in  their  district  in  com- 
merce, agriculture  or  some  other  industrial  pursuit. 

Class  C  shall  consist  of  three  members  who  shall  be  designated 
by  the  Federal  Reserve  Roard.  When  the  necessary  subscrip- 
tions to  the  capital  stock  have  been  obtained  for  the  organiza- 
tion of  any  Federal  reserve  bank,  the  Federal  Reserve  Board 
shall  appoint  the  class  C  directors  and  shall  designate  one  of 
sucli  directors  as  cliairman  of  tlie  board  to  be  selected.  Pond- 
ing the  designation  of  siich  cliairman,  the  organization  com- 
mittee shall  exercise  the  powers  and  duties  appertaining  to  the 
office  of  chainnan  in  the  organization  of  such  Federal  reserve 
bank. 

No  Senator  or  Representative  in  Congress  shall  be  a  member 
of  the  Federal  Reseine  Hoard  or  an  officer  or  a  director  of  a 
Federal  reserve  bank. 

No  director  of  class  B  shall  be  an  officer,  director  or  employee 
of  any  bank. 

No  director  of  class  C  shall  be  an  officer,  director,  employee 
or  stockholder  of  any  bank. 


APPENDIX 


557 


Directors  of  class  A  iind  class  B  fliall  be  chosen  in  tlic  follow- 
iii(r  manner: 

Tlic  chairman  of  the  hoard  of  directors  of  the  F  dcral  reserve 
li.uik  of  the  district  in  which  the  hank  is  situated  or,  pending; 
the  appointment  of  such  chairman,  the  organization  conmiittec 
shall  classify'  the  member  banks  of  the  district  into  three  <riner,il 
;4roiips  or  divisions.  Each  group  shall  contain  as  nearly  as 
mav  be  one-third  of  the  aggregate  number  of  the  member  banks 
of  the  district  and  shall  consist,  as  nearly  as  may  be.  of  banks 
(•f  similar  capitalization.  The  groups  shall  be  designated  by- 
number  by  the  chairman. 

At  a  regularly  called  meeting  of  tlio  board  of  directors  of 
each  member  bank  in  the  district  it  shall  elect  by  ballot  a  district 
reserve  elector  and  shall  certify  his  name  to  the  chairman  of 
the  board  of  directors  of  the  Federal  reserve  bank  of  the  district. 
The  chairman  shall  make  hsts  of  the  district  reserve  electors 
thus  named  by  banks  in  e^ach  of  the  aforesaid  three  groups  and 
shall  transmit  one  list  to  each  elector  in  each  group. 

Each  member  bank  shall  be  -Permitted  to  nominate  to  the 
chairman  one  candidate  for  d.  )r  of  class  A  and  one  candi- 

date for  dirtctor  of  class  B.  Tl.  candidates  so  nominated  shall 
be  listed  by  the  chairman,  indicating  by  whom  nominated,  and 
a  copy  of  said  list  shall,  within  fifteen  days  after  its  completion, 
be  furnished  by  the  chairman  to  each  elector. 

Every  elector  shall,  with  fifteen  days  after  the  receipt  of  the 
said  list,  certify  to  the  chairman  his  first,  second,  and  other 
choices  of  a  director  of  class  A  and  class  B,  respectively,  upon 
a  preferential  ballot,  on  a  form  furnished  by  the  chairman  of 
the  board  of  directors  of  the  Federal  reserve  bank  -if  the  district. 
Each  elector  shall  make  a  cross  opposite  the  name  of  the  first, 
second,  and  other  choices  for  a  director  of  class  A  and  for  a 
director  of  class  B,  but  shall  not  vote  more  than  one  choice  for 
any  one  candidate. 

Any   candidate  having   a   majority   of  all    votes    cast   in    the 


,,1  „i. 


Tf 


.,A;A.,^r 


have  a  majority  of  n\\  the  votes  in  the  first  cohnnti,  then  tin  re 
shall  be  added  together  the  votes  cast  by  the  electors  for  such 


II 


5.58 


APPENDIX 


i:w«:-»-.^'. 


candidates  in  the  .second  colunui  and  tl.e  votes  cast  for  tlx 
several  candidates  in  the  first  eohnnn.  If  any  candidate  then 
Imve  a  majority  of  tl.e  electors  voting,  hy  addin^r  together  the 
first  and  second  choices,  he  shall  I.e  declar.'d  elected  If  „„ 
can.hdate  have  a  majority  of  electr,rs  votin-  ^vhen  the  first  an,| 
second  choices  shall  have  been  added,  then  the  votes  cast  in  the 
third  column  for  other  choices  shall  he  added  together  in  like 
'".mner,  and  the  candidate  then  havin-  the  hi^d.est  number  of 
votes  shall  he  declared  elected.  An  immediate  report  of  elec- 
tion shall  he  declared. 

Class  C  directors  shall  be  appointed  by  the  Federal  Reserve 
Board.      They  shall  have  been   for  at  least  two  years  residents 
"f  the  district  for  which  they  are  appointed,  one  of  whom  shall 
be  designated  by  said  board  as  chairman  of  the  board  of  direc- 
tors   of    the    Federal    reserve   bank    an<l    as    "Federal    resene 
affont."     He  shall  be  a   person  of  tested  banking  experience- 
and  in  addition  to  his  duties  as  chairman  of  the  board  of  direc- 
tors of  the  Federal  reserve  bank  he  shall  be  required  to  maintain 
under    regulations    to    be    established    by    the    Federal    Reserve 
Board  a  local  office  of  said  board  on  the  premises  of  the  Federal 
reserve  bank.      He  shall  make  regular  reports   to   the  Federal 
Reserve  Board,  and  shall   act   as  its  official   representative  for 
the  performance  of  the  functions  conferred  upon  it  by  this  Act. 
He   shall    receive   an    annual   compensation    to    be  fixe.l  by   the 
Federal  Reserve  Board  an.l  paid  monthlv  by  the  Federal  reserve 
i)ank  to  which  he  is  designated.      One  of  the  directors  of  class  C 
who   shall   be  a  person   of  teste,!   banking  experience,   shall  be 
appointed   by   the   Federal   Reserve  Board  as  deputy  chairman 
and  deputy  Frderal  reserve  agent  to  exercise  the  powers  of  the 
chairman   of  the   board  and   Federal   reserve  agent   in   case   of 
absence  or  disability  of  his  principal. 

Directors  of  Federal  reserve  banks  sliall  receive,  l„  addition 
to  any  compensation  otherwise  ,,rovid.  ,1.  a  reasonable  allowance 
for  necessary  expenses  in  attending  meetings  of  their  respective 
boards,  which  amount  shall  be  paid  bv  tl-e  rpspppfjve  Federal 
restive  banks.  Any  compensation  tlmt  may  be  provide.!  hy 
boards  of  directors  of  Federal  reserve  banksfor  directors,  offi- 


APrKNDIX 


55!) 


-t  for  tho 
idato  tlun 
Sotlirr  the 
ci.  If  no 
3  first  and 
•nst  in  the 
ler  in  like 
iuinl)er  of 
t  of  clec- 

1  Reserve 

residents 
lioni  shall 

of  dircc- 
I  reserve 
pcrience; 

of  direc- 
inaiiitain 

Kescr\e 
?  Federal 

Federal 
ativc  for 
this  Act. 
I  hv  tlie 
I  reserve 
■  class  C, 
shall  1)0 
hairman 
•s  of  the 

case   of 

iiddition 
'lowanco 

spcctivo 

■p.- J.-.-.-..1 

Ided    I)v 
)rs,  offi- 


(•  IS  or  employees  sliall  he  subject  to  the  approval  of  the  Fed- 
tr  il  Reserve  Board. 

The  Reserve  Bank  Orrranization  romniittce  may,  in  orrraniz- 
iii;;  Federal  reserve  banks,  call  such  meetin<Ts  of  bank  directors 
i.'i  the  several  districts  as  may  i)e  necessary  to  carry  out  the 
purposes  of  this  Act,  and  may  exercise  the  functions  herein 
conferred  upon  tlic  chjiirman  of  the  l)f)ard  of  directors  of  each 
I'rderal  reserve  bank  pending  the  complete  organization  of 
>ueh  bank. 

At  the  first  meeting  of  the  full  board  of  directors  of  each 
Federal  reserve  bank,  it  shall  ho  the  duty  of  the  directors  of 
classes  A,  B  and  C",  respectively,  to  designate  one  of  the  mem- 
bers of  each  class  whose  term  of  office  shall  expire  in  one  year 
from  the  first  of  January  nearest  to  date  of  such  meeting,  one 
uhosc  term,  of  office  shall  expire  at  the  end  of  two  years  from 
said  date,  and  one  whoso  term  of  office  shall  expire  at  tlic  end 
of  three  years  from  said  date.  Thereafter  every  director  of  a 
Federal  reserve  bank  chosen  as  licreinbefore  provided  shall  hold 
office  for  a  term  of  three  years.  Vacancies  that  may  occur  in 
the  several  classes  of  directors  of  Federal  reserve  banks  may  be 
filled  in  the  manner  provided  for  the  original  selection  of  such 
directors,  such  appointees  to  hold  office  for  the  unexpired  terms 
of  their  predecessors. 

STOCK    ISSl'KS;    IXCRKASK   AND    nKCRKASE   OF   rAPITAL. 

Sf.c.  .'5.  The  capital  stock  of  each  Federal  reserve  bank  shall 
he  divided  into  shares  of  i^lOO  each  The  outstanding  capital 
stock  shall  be  increased  from  'ime  to  time  as  member  ])anks 
increase  their  capital  stock  and  surplus  or  as  additional  banks 
become  members,  a. id  may  be  decreased  as  member  banks  reduce 
their  capital  stock  or  surplus  or  cease  to  be  members.  Shares 
of  the  capital  stock  of  Federal  reserve  banks  owned  by  member 
banks  shall  not  be  transferred  or  hypothecated.      When  a  mem- 

:;r:      ;;.;::r.     :::\  i  \.:\~'^  ~     ■■  '     .:.••••• ; - 

upon  subscril)e  for  an  additional  amount  of  capital  stock  of  tlio 
Federal  reserve  bank  of  its  district  efjual  to  six  per  centum  of 


i 


■:|1. 


15 


.560 


ArPEXDIX 


the  said  Increase,  one-half  of  said  subscription  to  be  paid  in  the 
manner  hereinbefore  provided  for  orij^jnal  subscription,  and 
one-half  subject  to  call  of  the  Federal  Reserve  Board.  A  bank 
a{)plyin<;  for  stock  in  a  Federal  reserve  bank  at  any  time  after 
the  organization  thereof  nnist  subscribe  for  an  amount  of  the 
capital  stock  of  the  Federal  reserve  bank  cfjual  to  six  pn- 
centum  of  the  paid-up  capital  stock  nnd  .surj)lus  of  said  appli- 
cant bank,  pavinf,^  therefor  its  par  value  plus  one-half  of  nr.9. 
per  centum  a  month  from  the  period  of  the  last  dividend.  Whdi 
the  capital  .stock  of  any  Federal  resen-e  bank  shall  have  be.  n 
increased  either  on  account  of  the  increase  of  capit.al  stock  of 
member  banks  or  on  account  of  the  increase  in  the  number  of 
member  banks,  the  board  of  directors  shall  cuise  to  be  executed 
a  certificate  to  the  ("omptroller  of  the  Currency  showing  the 
increase  in  capital  stock,  the  a, Mount  p.iid  in,  and  by  whom 
I)ai(l.  When  ;i  member  bank  reiluces  its  capital  stock  it  shall 
surrender  a  ]irnj)ort  ionate  amount  of  its  holding  in  the  capital 
of  said  l''((ler,il  res.  rve  bank,  and  «hen  a  i  ,!inber  bank  voluntar- 
ily licpiidates  it  shall  surreiuler  all  of  ils  holdings  of  the  capital 
stock  of  said  Fed.ral  reserve  bank  ;uid  be  ndeased  from  its 
stock  subscription  no^  f)reviously  called.  In  either  case  th.> 
shares  surrendered  shall  be  citiceled  and  the  member  bank  shall 
receive  in  payment  th.refor.  under  regulations  to  b."  pr.'scrib.  .1 
by  the  I'.deral  Reserve  Hoard,  a  sum  e(|iial  to  its  cash-p.uid  sub- 
scriptions on  the  shares  suncndered  and  one-half  of  on.^  j)cr 
centum  a  month  rn.ni  the  period  of  the  last  dividend,  not  f.i 
exce.'d  the  book  vain.'  theriof,  I.  ss  any  liability  of  such  member 
bank  to  the  1'.  .1.  ral  reserv.'  bank. 

Si.-.  G.  If  any  mi  niber  bank  shall  be  declared  insolvent  and 
a  receiver  appoint..!  th.  n f.u-.  Ww  stock  held  |,v  it  in  sai.l 
I'Vdcral  reserve  bank  shall  be  canciled.  without  impairmi'nt  of 
its  liabilit\.  and  all  cash-paid  Mib-cription^  on  said  stock,  with 
one-half  of  one  [>.  r  .■entuin  p.  r  month  from  the  period  of  last 
(livid,  nd.  not  to  I'xce.'d  ti,,.  l,ook  \ahi.'  t''er.'.)f.  sliall  be  fir-' 
•ipph.  .1  to  all  debts  .if  tln'  insiilvciit  in.  .n.!,..  r  !..!.;l  I,,  tl...  I.'.-L,^,.! 
reserve  b.ank.  .and  the  bai.ance,  if  Miiy.  shall  be  paid  to  tli.' 
receiver  of  the  insolvent  bank.      Whenever  the  capita!  stock  of  a 


APPENDIX 


561 


IVdcral  rcscn-e  hank  is  reduced,  either  on  ;iee<)iiiit  of  a  rtdiu- 
tioii  in  capital  stock  of  any  inei.ilier  l)ank  or  of  tlie  liquidalioii 
or  insolvency  of  such  i)ank,  the  hoard  of  chrectors  sliall  eaii-i 
to  he  executed  a  certificate  to  the  ("onif)trolh'r  of  tlie  Curreriev 
showing  such  reduction  of  capital  stock  and  the  amount  repaid 
to  such  hank. 


niVISIOX    OF    KARNIXr.S. 


f' 


Si:r.  7.  After  all  necessary  i  \f)enses  of  a  I'ederal  reserve 
hank  have  i)een  j)aiil  o.-  provid<d  for,  tlie  stockiiolders  >hall  he 
(iititled  to  receive  an  animal  divid.  nd  of  >i\  per  ceiituin  on  the 
paid-in  capital  stock,  whicii  dividend  -liall  i)e  cuniiilatlve.  After 
the  aforesaid  dividend  claims  have  heeii  fully  imt,  a  .  the  m  f 
earnings  shall  he  paid  to  the  Fnited  States  as  a  franchlx'  tax, 
( Acept  that  one-half  of  sucli  net  earnings  shall  he  paid  into  a 
surplus  fluid  until  it  >hall  amount  to  forty  j)er  centum  of  tiie 
paid-in  capital  stock  of  such  hank. 

The  net  earniners  derived  l)y  the  T^nitiMl  States  from  Federal 
reserve  hanks  shall,  in  the  discretion  of  the  Secretary,  he  used  to 
supplement  the  gold  reserve  held  against  outstanding  United 
States  notes,  or  shall  he  applied  to  the  reduction  of  the  out- 
stmding  honded  indi'htedness  of  the  rin'ted  Statis  under  regu- 
lations to  he  prescrihed  hy  the  Secretary  of  the  Treasurv. 
Should  a  Federal  reserve  hank  he  dissolved  or  go  into  liipilda- 
tion,  any  surplus  remaining,  after  the  payment  of  all  ddiU, 
ili\ldend  reciuirements  as  lieriinhefore  |)r()vided,  and  the  par 
\alu{>  of  the  stock,  shall  he  paid  to  and  liecome  the  j)riii)rrt\ 
of  the  I'nited  States  and  shall  he  similarly  aj)plied. 

Federal  reserve  hanks,  inchwiing  the  capital  stock  and  sur- 
jilus  therein,  and  the  income  derived  therefrom  shall  he  oxem[)t 
from  Federal,  State,  and  local  taxation,  except  taxes  upon  real 
'state. 

Si:c.  M.  Section  fifty-one  hundrid  and  flft\  ''our,  rnitfd 
States  Itcvised  Statutes,  is  herehv  am.  ndrd  to  r<  a<l  as  follow.s: 

Any  hank  incorporated  hy  special  Ian  of  anv  State  or  of  llie 
rnitcd  States  or  organized  under  the  general  laws  of  anv  Statr 


(« 


:-fr 


5GiJ 


APPENDIX 


19' ■ 

m 


u  - 


or  of  the  United  States  and  liavin<^  an  unimpaired  capital  suffi- 
cient to  entitle  it  to  become  a  national  hanking  association 
under  the  provisions  of  the  existin<r  laws  may,  by  the  vote  of 
the  shareholder  owninrr  not  less  than  fiftv-one  per  centum  of 
the  capital  ,->t(){  K  of  such  bank  or  banking  association,  with  the 
approval  of  the  Comptroller  of  the  Currency  l)e  converted  into 
a  nai  onal  banking  association,  with  any  name  approved  by  the 
Comptroller  of  the  Currency: 

Provided,  hozccvir.  That  said  conversion  shall  not  be  in  con- 
travention of  the  State  law.  In  .such  case  the  articles  of  asso- 
ciation and  organization  certificate  may  be  executed  by  a  major- 
ity of  the  din ctors  of  the  bank  or  banking  institution,  and  the 
certificate  shall  declare  that  the  owners  of  fifty-o"e  per  centum 
of  the  capital  stock  have  authorized  the  directors  h)  make  such 
certificate  and  to  change  or  convert  the  bank  or  anking  insti- 
tution into  a  national  association.  A  majority  of  the  directors, 
after  executing  the  articles  of  association  and  the  organization 
certificate,  sh  dl  have  power  to  execute  all  other  papers  and  to 
do  whatever  may  be  re(juired  to  make  its  organization  perfect 
and  I'ompli'te  as  a  national  association.  The  shares  ot  any  such 
bank  may  continue  to  be  for  the  same  amount  each  as  they  were 
before  the  con\ersion,  and  the  directors  may  continue  to  be  di- 
rectors of  the  association  until  others  ar(>  elected  or  aj)pointed 
in  accordance  with  the  provisions  of  the  statutes  of  the  United 
States.  When  the  Comptroller  has  given  to  such  bank  or  bank- 
ing association  a  certificate  that  the  j)rovisions  of  this  Act 
have  been  complied  with,  such  bank  or  banking  association,  and 
all  its  stockhcldfi's,  offi('(  rs,  and  emj)loyces,  shall  have  the  same 
powers  and  privileges,  and  shall  be  subject  to  the  same  duties, 
liabilities,  and  regulations,  in  all  respects,  as  shall  have  been 
prescribed  by  the  Federal  Reserve  Act  and  by  thi-  national  bank- 
ing Act  for  associations  originally  organized  as  national  bank- 
ing associations. 


STATK    HA.NKH  .\S    MKMIIKRS. 


Skp.  9.    Any  bank  incorjiorafed  by  special  law  of  any  State, 
or  organizi'd    undi  r   the   /general    laws   of  any   State  or   of   the 


ArrENDix 


56;] 


Iiiitcd  States,  may  tn.ikc  application  to  the  reserve  bank  organi- 
zation committee,  pending  organization,  and  thereafter  to  the 
I'lderal  Reserve  Board  for  the  right  to  subscribe  to  the  stock  of 

!ir  Federal  reserve  I;ank  organized  or  to  be  organized  within 
the  Federal  reserve  district  where  the  applicant  is  located.  The 
organization  committee  or  the  Federal  Iteservc  Board,  under 
Mich  rules  and  regulations  as  it  -nay  prescribe,  subject  to  the 
provisions  of  this  section,  may  permit  the  applying  bank  to  be- 
come a  stockholder  in  the  Federal  reserve  bank  of  the  district 
in  which  the  applying  bank  is  located.  Whenever  the  organiza- 
tinii  committee  or  the  Federal  Reserve  Board  shall  permit  the 
.ipi)lying  bank  to  become  a  stockholder  in  the  Fi>deral  reserve 
li.itik  of  the  district,  stock  shall  be  issued  arid  paid  for  under 
the  rules  and  regulations  in  this  Act  provided  for  national  banks 
uhich  become  stockholders  in  Federal  reserve  banks. 

The  organization  committee  or  the  Federal  Reserve  Board 
shall  establish  by-laws  for  the  general  government  of  its  conduct 
ill  acting  upon  ap[)lications  made  by  the  State  banks  and  bank- 
ing associations  and  trust  companies  for  stock  ownership  in 
l"((leral  reserve  banks.  Such  by-laws  shall  require  applying 
liiiiks  not  organized  under  Federal  law  to  comply  with  the  re- 
M  rve  and  capital  recjuirements  jmd  to  sui)mit  to  the  examination 
and  regtdations  prescribed  by  the  organization  committee  or  by 
the  I'sderal  Reserve  Board.  No  applying  bank  sh/dl  be  ad- 
mitted to  membership  in  a  Federal  reserve  bank  unless  it  pos- 
V' ss(  s  a  paid-uf)  unimpaired  capital  sufficient  to  entitle  it  to 
lireome  a  national  banking  association  in  the  place  where  it  is 
Mtiiated,  under  the  provisions  of  the  national  banking  Act. 

Any  bank  becoming  .i  menil  r  of  ,i  Federal  reserve  l)ank 
under  Ihe  provisions  of  this  section  shall,  in  addition  to  the 
regulations  and  restrictions  hereinbefore  f)rovide(l,  be  required 
'o  conform  to  the  provisions  of  law  im|)osod  on  the  national 
Iriiiks  respecting  the  limitation  of  ii.'ibiiiiy  which  mav  be  in- 
■  urred  by  any  person,  firm,  or  corporation  to  sucli  b.mks,  the 
ii'ihibition    against    making  |)urchase   of  or  loans  on   stock   of 

leh  banks,  and  the  withdrawal  or  impairment  of  capital,  or  the 
payment  of  unearned  dividends,  and  to  such  rules  and  regula- 


l! 


o6i 


APPENDIX 


tions  as  the  Fctlcral  Hcscr\c  Hoard  may,  in  pursuance  thcrt'of, 
pn  scribe. 

siieli  l)anks,  and  the  officers,  agents  and  employees  tlicrcof. 
shall  also  he  subject  to  tlie  provisions  of  and  to  the  penalties 
prescribed  l)y  sections  fifty-one  hundred  and  ninety-eight,  fiftv- 
two  hundred,  fifty-two  hundred  and  one.  and  fifty-two  hundred 
and  eight,  and  fifty-two  hundred  and  nine  of  the  Revised  Stat- 
utes. The  member  banks  shall  also  be  required  to  make  reports 
of  the  conditions  and  of  the  payments  of  dividends  to  t!ie  comp- 
troller, as  provided  in  sections  fifty-two  hundred  and  eleven  and 
fifty-two  hundred  and  twelve  of  the  Revised  Statutes,  and  shall 
l)e  subject  to  the  j)enalties  prescribed  by  section  fift-  -two  hun- 
dred and  thirteen  for  the  failure  to  make  such  report. 

If  at  any  time  it  shall  appear  to  the  Federal  Reserve  Rn.ird 
that  a  member  bank  lias  failed  to  comply  with  the  provisions 
of  this  section  or  the  regulations  of  the  Federal  Reserve  Board, 
it  shall  be  within  the  power  of  f  id  board,  after  hearing,  to 

require  such  bank  to  surrender  ..  siock  in  the  Feileral  reserve 
hank;  upon  such  surrender  the  Federal  reserve  bank  shall  pav 
the  cash-paid  subscriptions  to  the  said  stock  with  interest  at  the 
rate  of  one-half  of  one  per  centum  per  month,  computed  frnni 
the  last  (ll\i(lend,  if  earned,  not  to  exceed  the  book  value  thereof, 
less  any  liability  to  said  I'Vderai  reNcrve  bank,  except  the  suii- 
scription  liability  not  previously  called,  which  shall  be  caiu-ided. 
and  said  Federal  reserve  bank  shall,  upon  notice  from  the 
Federal  Reserve  Hoard,  be  requind  to  suspend  said  bank  from 
further  [)rivileges  of  meinlx  isliip,  aiid  shall  within  thirtv  davs 
of  such  notice  canc(d  and  retire  its  stock  and  make  pavmeiit 
therefor  in  tlie  manner  herein  pro\  ided.  The  l-'ederal  Reserve 
Hoard  may  restore  meMibership  u[)on  due  proof  of  compliance 
with  the  conditions  imposed  by  this  section. 


K* 


FrnriiM.   iitsmvi.   iioahi). 


Srr.  10.    A    FicHM-al   Heservp  Rna.rd   !s  lierehv  rre.itod  »r!>!:l'. 

shall  <-onsist   of  seven  members.  Including  the  Secretarv  of  the 

Trcusury  and  the  ('omi»l  roller  of  the  Currency,  who    dmll  !'> 
c— Vll— :«) 


ArrENDix 


ofi5 


nidiihcrs  ex  officio,  and  five  iiieinl)ers  appointed  by  the  President 
of  the  United  States,  by  and  with  the  advice  and  consent  of 
Ihc  Senate.  In  selecting  the  five  appointive  members  of  the 
I'.dcral  Reserve  Board,  not  more  than  one  of  whom  shall  be 
.selected  from  any  one  Federal  reserve  district,  the  President 
s.liall  have  due  regard  to  a  fair  representation  of  the  different 
commercial,  industrial  and  geographical  divisions  of  the  coun- 
t'v.  The  five  members  of  the  Federal  Reserve  Hoard  appointed 
l)V  tlie  President  and  confirmed  as  aforesaid  shall  devote  their 
entire  time  to  the  business  of  the  Federal  Reserve  Board  and 
shall  ciich  receive  an  annual  salary  of  $Ui,()0(),  payable  monthly 
fi.nvther  with  actual  necessary  traveling  expenses,  and  the 
(  ninj)troll(  r  of  the  Currency,  as  ex  officio  member  of  the  Federal 
li.M'rve  Board,  shall,  in  addition  to  the  salary  now  paid  him 
lis  Comptroller  of  the  Currency,  receive  the  sum  of  $7,000  an- 
niiailv  for  his  services  as  a  member  of  said  Board. 

The  members  of  said  board,  the  Secretary  of  the  Treasury, 
the  Assistant  Secretaries  o"  the  Treasury,  :ind  the  Comptroller 
iif  the  Currency  sh.ill  be  ineligible  during  the  time  they  are  in 
otHce  and  for  two  years  tlurealter  to  hold  any  office,  position, 
or  employment  in  any  member  i)ank.  Of  the  five  members  tlu's 
:i|)|)ointed  by  the  President  at  least  two  shall  be  perscms  ex- 
perienced in  banking  or  finance.  One  shdl  be  desigiiated  by 
Mie  President  to  serve  for  two,  one  for  four,  one  for  six,  one  for 
eight,  and  one  for  ten  vears,  and  thereafter  each  member  so 
.ippointed  sh  !1  serM-  for  a  term  of  ten  yiars  uidess  sooner  re- 
moved for  t'ause  by  the  President.  Of  the  five  persons  thus 
.•i|)i)ointed,  one  shall  be  designated  liy  the  President  as  governor 
iiid  one  as  vice  iroveinnr  of  the  T'edeivd  Reserve  Board.  The 
L;nvernor  of  the  Federal  Reserve  Board,  subject  to  it-,  super- 
\l>ion,  shall  be  ilie  active  executive  officer.  The  Secretary  of 
the  Treasury  may  assign  offices  in  the  Department  of  the  Treas- 
nrv  for  the  use  of  the  Fe<leral  Reserve  Board.  F.ach  member 
of   the   Federal    Reserve    Board    shall   within    fifteen   days    after 

..  .  !•  •t..l  It^/T* 

ilinuiii    iii.ii\c   and   >Ui>MTiin-   Tu   THr    «<.tTn  or    oniCP. 


M' 


'I'lie    I'ederal    Re.ervc    Board    shall    liave   power   to  levy 


!|l 


seMU 


Iv  upon  the  i'edi  r.il  resi'rve  banks,  in  [iroportion  to  their 


.,../ 


566 


ArPFADIX 


■  ■■■ 

[  i  '  H 


!»: 


capital  stock  and  surplus,  an  assessment  sufficient  to  pay  its 
estimated  expenses  and  the  -^jilaries  of  its  meml)ers  and  employees 
for  the  half  year  >uccee(iiiirp  the  levyin<^  of  such  assessment, 
ton-ether  with  any  deficit  carried  forward  from  the  preceding 
lialf  year. 

The  first  meeting  of  the  Federal  Reserve  Board  shall  be  held  in 
Washington,  District  of  C"oluml)ia,  as  soon  as  may  be  after  the 
passage  of  this  Ac^  at  a  date  to  l)e  fixed  by  tlie  Kesene  Bunk 
Organization  I'onnnittee.  The  Secretary  of  the  Treasury  shall 
be  ex  of'icio  chairman  of  the  Federal  Reserve  Board.  No  mem- 
ber of  the  Federal  Reserve  Board  shall  be  an  officer  or  director 
of  any  bank,  banking  institution,  trust  company,  or  Federal 
reserve  bank  nor  hold  .stock  in  any  bank,  banking  institution,  or 
trust  company:  and  before  entering  ujjon  his  duties  as  a  mem- 
ber of  the  Federal  Res(  rve  Board  he  shall  certifv  under  oath  to 
the  Secretary  of  the  'J'reasury  that  he  has  complied  with  this 
requirement.  Whenever  ;i  vacaiuy  shall  occur,  other  than  bv 
expiration  of  term,  among  the  five  members  of  the  Federal 
Reserve  Board  appointed  i)y  the  Fresident,  as  above  provided, 
a  successor  shall  be  a})pointr(l  liy  the  President,  with  tlie  .idviee 
and  consent  of  the  Senate,  to  fill  such  vacancy,  and  when  ap- 
[)oiided  he  shall  hold  oflice  for  the  unexpired  term  of  the  mem- 
ber whose  l)lace  he  is  sdicted   to  fill. 

The  Fres'd.nt  shall  !i;ive  powtr  to  fill  all  v  ancies  (hat  may 
li.ipixii  on  the  I'.drral  Rcs.rvi  Hoard  during  the  recess  of  tlu- 
Stnate,  by  grarding  connnissions  which  shall  expire  fhirtv  days 
after  the  next   session   of  the  Senate  convenes. 

Nothing  in  this  A,  I  contained  shall  be  construed  as  takiii<j 
aw;i\  any  powi  rs  heretofore  vested  by  law  in  tli(>  Secretary  of 
the  'I'reasnry  which  relate  to  the  supc  rvlsior!,  management  and 
control  of  the  'I'reasury  Departm.'rit  and  Iiureaus  niider  sucli 
department,  and  wh.erever  any  power  v.stdl  by  this  Act  in  llie 
V'ederal  l{(serv>  Hoard  or  the  I'ederal  reserve  .agent  appears  tn 
conflict  with  the  powers  of  the  Secretary  of  the  Treasury,  such 
powers  .siiaii  be  exercised  sub ject  to  tiie  supervision  and  (a)ntrol 


irv. 


)f  the  Seeivl 
The  I'ederal  Reserve  Board  shall 


innuallv  make  a 


full 


renoit 


APPENDIX 


567 


of  its  operations  to  the  Speaker  of  the  House  of  Represent<a- 
tives,  who  shall  cause  the  same  to  be  printed  for  the  information 
of  the  Congress. 

Section  three  hundred  and  twenty-four  of  t'  ■  Revised  Stat- 
utes of  the  United  States  shall  be  amended  so  as  to  read  as 
follows:  There  shall  be  in  the  Department  of  the  Treasury  a 
liureau  charged  with  the  execution  of  all  laws  passed  by  Con- 
trress  relating  to  the  issue  and  regulation  of  national  currency 
secured  by  I'nited  States  bonds  and,  under  the  general  super- 
vision of  the  Federal  Reserve  Board,  of  all  Federal  reserve 
notes,  the  chief  officer  of  which  bureau  shall  be  called  the  I'omp- 
i  roller  of  the  Currency  and  shall  perform  his  duties  under  the 
uiiieral  directions  of  the  Secretary  of  the  Treasury. 

Skc.  11.  The  Federal  Reserve  Board  shall  be  authorized  and 
<  mpowercd: 

(a)  To  examine  at  its  discretion  the  accounts,  books  and 
affairs  of  each  Federal  reserve  bank  and  of  each  niem!)er  bank 
and  to  require  such  statements  and  reports  as  it  may  deem 
necessary.  The  said  board  shall  publish  once  each  week  a 
>tatement  showing  the  condition  of  each  Federal  reserve  bank 
and  a  consolidated  statement  for  all  Federal  reserve  banks. 
Such  statements  shall  show  in  detail  the  assets  and  liabilities  of 
the  Federal  reserve  banks,  single  and  combined,  and  shall  fur- 
nish full  information  regarding  the  character  of  the  money 
liild  as  reserve  and  the  amount,  nature  and  maturities  of  the 
I)aper  and  other  investments  owned  or  held  by  Federal  reserve 
banks. 

(b)  To  permit,  or,  on  tlie  aHirmat!\e  vote  of  at  least  five 
members  of  the  Reserve  Board,  to  re<|iiire  I'ld-ral  reserve  banks 
to  rediscount  the  discounted  ])a|)(r  of  other  Federal  reserve 
banks  at  rates  of  interest  to  be  fixed  by  the  Federal  Reserve 
lioard. 

(c)  To  suspend  for  a  period  not  exceeding  thirty  days,  and 
from    time   to    time    to    renew   such   suspension    for    periods    aot 


:n  .1 


Act  :   Prov'uJid.   That    it    shall  establish   a   graduated  tax   ujxm 
the  amounts  bv  which  the  reserve  requin  inents  of  this  Act  may 


rA\H 


APPENDIX 


r^ 


be  porr.,ttod  to  fall  below  the   level  hereinafter  specified:  ./,./ 
pror.Jal  furt,,rr.  That  «he„  the  ^old  reserve  held  against  Fe.l- 
-al   reserve   notes    falls    hehnv    forty   per   centu.n,   the   Federal 
ii-erve  Board  shall  establish  a  .raduat.  d  tax  of  not  „,ore  than 
<"'e    per    eent.un    per   annum    upo.i    such    deficiency    until    th. 
"".'■"'^   ''•'"/;;  \'"'-^>-*""  -">   --)>alf  per  centun;,  and  when 
s.K   reserve  falls  belo.  thirty-two  and  one-half  per  centun,,  a  tax 
at     he  rate  uu.reasu.o.ly  of  not  less  than   one  and  one-half  per 
-ntun,  per  annun.  upon  each  two  and  one-half  per  centun,   or 
-•  ";;   """-     t'-t   such   reserve    falls   below   thirty-two   and 
;-;''^P--un,       TlH.  tax  shall  be  paid  by  the  reJerve  bank, 
't   «lK.  reserve  bank  shall  a.hl  an  a„u>unt  ec,ual  to  said  tax  to 
H.  rates  of  interest  and  discount  fixed  In'  the  Federal  Reserve 
iJoard. 

(.1)    To   supervise   and   regulate   through   the   bureau   under 

Ih.  .harge  of  tlu.  (-on.ptroller  of  the  Currencv  the  issue  and  re- 

-nnent   nf  Federal    reserve  notes,  and    to   p,-escribe  rules   and 

y^adat.ons    under    which    such    not,.   „,.y    be   deliven.!    by   the 

Comptroller  to  tlu.  l.^.deral  reserve  agents  applying  theref^n-. 

(e)  lo  ad<l  to  the  number  of  cities  classified  as  .vserve  and 
-"f'-al  .--..ru.  ..iti...  un.ler  existing  law  in  which  national  bank- 
...g  assoc.at,ons  are  subject  to  th.  .vserve  requiren.ents  set 
^'"'"""  7"""  '"•-".^•o''  "'is  Act;  o..  to  reclassify  ..istin-. 
-serve  and  central  reserve  cities  or  to  tern.inate  their  desbnu;^ 
tion  as  such.  ° 

in  To  suspeud  or  remove  any  officer  or  director  of  any 
'-'"•■■'1  reserv.  bank,  the  cause  of  su<h  ren.oval  to  be  forth- 
-  I.  .onmnnncated  in  writing  hy  the  Federal  Uescrve  Board 
'"  <'"•  n  ni.,v<,l  ofMcer  or  director  and  to  sai.l  bank 

(M-)  To  re.,,n-re  the  writing  off  of  doubtful  or  worthless  assets 
"P""  tJ'-  books  anrl  balance  sheets  of  Federal  reserve  I,anks 

(')  To  suspend,  for  the  violation  of  :,„y  of  the  provisions 
"i  "-  Act,  he  operations  nf  any  Federal  reserve  bank,  to  take 
I-— n    thereof,   adn,inister   the    san,e   during    the    perio.l    of 

susDi'Msion.     iiiii     nil I,,p,„„,i  „J„;      i  i       

.      '       ,    ,  "■  ; -enRU  aa\i.Nar.i.,  u,  i,(jui(iaie  or  reoriran- 

i/e  such  bank.  ^ 

<')    ''■"    ••'-l"in.    bond,    nf    Federal    reserve    agents,    to    n.ake 


Vk 


APPENDIX 


,>Ci) 


riM.-ulations  for  the  safeguarding  of  all  collateral,  bonds,  Federal 
nscrve  notes,  money  or  property  of  any  kind  deposited  in  the 
liaiids  of  such  agents,  and  said  board  shall  perform  the  duties, 
functions  or  services  specified  in  this  Act,  and  make  all  rules 
and  regulations  necessary  to  enable  said  board  ctl'ectively  to 
[iirform  the  same. 

( j)  To  exerci.ie  general  supervision  over  said  Federal  reserve 
hanks. 

(k)  To  grant  by  special  permit  to  national  banks  applying 
tiiirefor,  when  not  in  contravention  of  State  or  local  law,  the 
right  to  act  as  trustt'c,  executor,  administrator  or  registrar  of 
stocks  and  bonds  under  such  rules  and  regulations  as  the  said 
imard  may  prescribe. 

(1)  To  iniploy  such  attorneys,  experts,  assistants,  clerks,  or 
otliir  employees  as  may  be  deemed  necessary  to  conduct  the 
liiisiness  of  tlie  board.  All  salaries  and  fees  shall  be  fixed  in 
advance  by  said  board  and  shall  be  paid  In  tli('  same  manner 
a-  the  salai'ies  of  the  members  of  said  board.  All  such  attor- 
iM  vs,  ex{)erts,  assistants,  clerks  and  other  employees  shall  be 
a[)pointed  without  regard  to  the  provisions  of  the  Act  of  Janu- 
arv  sixteenth,  eiglitecn  hundred  and  eighty-three  (volume  twen- 
l\  two  United  States  Statutes  at  Large,  page  four  hundred 
and  three),  and  unendmeuts  thereto,  ur  any  rule  or  regulation 
made  in  pursuance  thereof:  I'mT'idiil.  'J'hat  nothing  herein  shall 
prevent  the  President  from  placing  said  employees  in  the  classi- 
iied  sen  ice. 

FKni-.RAI,  ADVISORY   COVXCIL. 


Dr.r.  IS.  There  is  h(>reby  created  a  Federal  Advisory  Council, 
which  shall  consis.  of  as  many  meml)ers  as  there  are  Federal 
reserve  districts.  Each  Federal  reserve  bank  by  its  board  of 
directors  shall  annually  select  from  its  own  Federal  reserve 
district  one  member  of  said  council,  who  shall  receive  such  com- 


.1  ..f    i:. 


|niisiii  mil  .tini  .liii'Wancc.-,  as  iii.;y  ;><    :;\;;;  :;;    :;:~   - 

tors   subject    to    the   approval   of    the   Federal    Reserve    Board. 

The  meetiiiiTs  of  said  advisi.rv  cmuiicII  shall  be  held  at  Washing- 


570 


APPENDIX 


I:r5- 


ton.  District  of  Columbia,  at  least  four  times  each  year,  und 
oftener  if  called  by  the  Federal  Reserve  Board.  The  council 
may  in  addition  to  the  meetin^rs  above  provided  for  hold  such 
other  meetin<rs  i„  Washinn-ton,  District  of  ("olumbia,  or  else- 
where, as  it  may  deem  necessary,  may  select  its  own  officers  and 
adopt  its  own  methods  of  procedure,  and  a  majority  of  its  mem- 
bers shall  constitute  a  quorum  for  the  transaction  of  business. 
\'acancies  in  the  council  shall  be  filled  by  the  respective  reserve 
biuiks.  and  members  selected  to  fill  vacancies  shall  serve  for  the 
unexpired  tenn. 

Tlie  I'ederal  Advisory  Council  shall  have  power,  by  itself  or 
through  its  officers,  (1)  to  confer  directly  with  the  Federal 
Reserve  Board  on  general  business  conditions;  (2)  to  make 
oral  or  written  representations  concerning  matters  within  tlie 
jurisdiction  of  said  board;  (;3)  to  call  for  information  and  to 
make  reconnnendations  in  regard  to  discount  rates,  rediscount 
busmess,  note  issues,  reserve  conditions  in  the  various  districts, 
the  purchase  and  sale  of  gold  or  securities  bv  reserve  banks,' 
open-market  operations  by  said  banks,  and  the  general  affairs 
of  the  reserve  ban  kin  <;  system. 


POWKRS    OF    KKDKUAT,    RKSKRVE    BAXKS. 

Sf.c.  13.  Any  Federal  reserve  bank  may  receive  from  any 
of  Its  member  banks,  and  from  the  United  States,  deposits  of 
currvnt  funds  in  lawful  money,  national-bank  notes.  Federal 
reserve  notes,  or  check,  and  drafts  upon  solvent  member  bunks, 
payable  upon  presentation;  «r,  solely  for  exchange  purpose^, 
may  receive  from  other  Federal  reserve  banks  deposits  of  cur- 
rent funds  in  lauful  money,  national-bank  notes,  or  checks  a,ul 
drafts  u})on  solvent  Tuember  or  other  Federal  reserve  banks,  pay- 
able upon  presentation. 

Upon  the  indorsement  of  any  of  its  member  banks,  with  a 
waiver  oMemand,  notice  and  protest  by  su.l,  bank,  any  Federal 
rf-^crve  i^anK  may  wi-count  .i-.i,,,  (irnns  an(i  i)iijs  of  exchange 
arising  o,it  of  actual  cmnnercial  transactions;  that  is,  .u.trs, 
drafts,  and  bills  of  exchange  issu..l  or  drawn   for  agricultural^ 


APPENDIX 


.->7l 


industrial  or  commercial  purposes,  or  the  proceeds  of  which 
have  been  used,  or  are  to  be  used,  for  such  purposes,  the  Federal 
Reserve  Board  to  have  the  ri<.ht  to  detcmiine  or  define  the  char- 
acter of  the  paper  thus  eligible  for  discount,  within  the  mean- 
in<r  of  this  Act.      Nothing  in  this  Act  contained  shall  be  con- 
stnied  to  prohibit  such  notes,  drafts  and  bills  of  exchange,  se- 
cured by  staple  agricultural  products,  or  other  goods,  wares  or 
merchandise   from   l)eing   eligible  for  such  discount;  but   such 
definition  shall  not  include  notes,  drafts  or  bills  covering  merely 
investments  or  issued  or  drawn  for  the  purpose  of  carrying  or 
trading  in  stocks,  bonds  or  other  investment  securities,  except 
bunds  and  notes  of  the  (Joveriunent  of  tlie  United  States.    Notes, 
drafts   and  bills   admitted   to   discount  under  the   terms  of  this 
paragraph  must  have  a  maturity  at  the  time  of  discount  of  not 
more"than  ninety  days:  ProvhUd,  That  notes,  drafts  and  l)ills 
drawn  or  issued  for  agricultural  purposes  or  based  on  live  stock 
and  having  a  maturity  not  exceeding  six  months  may  be  dis- 
counted in  an  amount  to  be  limited  to  a  percentage  of  the  capi- 
tal of  the  Feder/d  reserve  bank,  to  be  ascertained  and  fixed  by 
the  Federal  Resene  Board. 

Any  Federal  reserve  bank  may  discount  acceptances  which 
are  based  on  the  importation  or  exportation  of  goods  and  which 
have  a  maturity  at  time  of  discount  of  not  more  than  three 
months,  and  indorsed  by  at  least  one  meml)er  bank.  The  amount 
of  acceptances  so  discounted  shall  at  no  time  exceed  one-half 
the  ppid-up  capital  stock  and  surplus  of  the  bank  for  which  the 
rediscoiuits  are  made. 

The  aggregate  of  such  notes  and  bills  bearing  the  signature 
or  indorsement  of  any  one  person,  company,  firm  or  corporation 
rediscounted  for  any  one  bank  shall  at  no  time  exceed  ten  per 
centum  of  the  unimpaired  capital  and  surplus  of  said  bank ;  but 
this  restriction  shall  not  apply  to  the  discount  of  bills  of  ex- 
clmnge  drawn  in  good  faith  against  actually  existing  values. 

Any  member  bank  may  accept  drafts  or  bills  of  exchange 
drawn  upon  it  and  growing  out  of  transactions  invouing  the 
importation  or  exportation  of  goo.ls  having  not  more  than  six 
months  sight  to  run  :  l)ut  no  bank  shall  accept  such  bills  to  an 


Hi^Z 


APPENDIX 


amount  equal  at  any  time  in  the  aggregate  to  more  than  one- 
'lalt  its  paid-up  capital  stock  and  surplus. 

Section  fiitj-tuo  hundred  and  two  of  the  Revised  Statutes  of 
the  United  States  is  herein-  amended  so  as  to  read  as  follows- 
-No  national  banking  association  shall  at  any  time  he  indebted 
"■•  ".  any  nay  hable,  to  an  amount  exceeding  the  amount  of  its 
'•'P'tal  stock  at  such  time  actually  paid  in  and  remaining  un- 
dmunished  by  losses  or  otherwise,  except  on  account  of  demands 
of   tlie  nature  followind-- 

First.    Notes  of  circulation. 

Second.  .Moneys  dei)osited  will,  or  collected  by  the  assocla- 
tion. 

'I'lunl.  Hills  of  exchange  or  drafts  drawn  against  money 
aetually  on  deposit  to  the  credit  of  the  association,  or  due 
thereto. 

Fourth.  Liabilities  to  the  stockholders  of  the  association  for 
dividends  and  reserve  profits. 

Fifth.  Liabilities  incurred  under  the  provisions  of  th.  'Vderal 
Reserve  Act. 

The    rediscount    by    any   Federal    reserve  bank    of    any   bii, 
receivable  and  of  domestic  and  foreign  bills  of  exchange,  and  of 
acceptanc.s   authorize,!   by    this    Act,   shall   be   subject  to   .such 
.-tn.'tions,  l.mit.t:  i  .        1  reguLtlons  as  may  be  imposed  by 
the  Federal  Reserve  Hoard. 


Ori'X-MAI{KF.T    OPKRATIOXS. 

Skc.   14.   Any   Federal   reserve   bank   may,   under   rule.s   and 

regulations  prescribed  by  the  Federal  Reserve  Hoard,  purchase 

■•u.d  sell  in  the  open  market,  at  home  or  abroad,  either  from  or 

to  domestic  or  foreign  banks,,  firm,  corporations  or  individuals, 

cable  transfers  and  bankers'  arcoptancos  and  bills  of  exchange 

of  the  kinds  and  maturities  by  this  Act  made  eligible  for  redis- 

ccmnt,  with  or  without  the  indorsement  of  a  member  bank. 

'p,,^,...  1?...} 1  I       ,     ,     ,,  ■ 

:_i   i  vv!t_:.;i  .L.iCi'.e  ./.'iiiiv  >.i,iii  iiavc  powcr : 

fa)    To  deal  In  gold  coin  and  l.ulllon  at  home  or  abroad,  to 
make  loans   thereon,  exchange  Federal    reserve  notes    for  gold, 


'  5»»*!*»«W«»»'r? 


ArPEXDlX 


:,i.i 


^old  coin,  or  gold  certificates,  and  to  contract  for  loans  of 
rrold  coin  or  bullion,  givinrr  tlicrcfor,  Mhen  necessary,  acccpt.ihlo 
security,  including  tlie  liypothccation  of  T'nitcd  States  bonds 
(ir  otlicr  securities  wliich  Federal  reserve  banks  are  authorized 
toi    Id; 

(b)  To  buy  and  sell,  at  lionie  or  abroad,  bonds  and  notes 
of  the  United  States,  and  bills,  notes,  revenue  bonds  ar.d  war- 
rants witli  a  maturity  from  date  of  purchase  of  not  exceeding 
six  months,  issued  in  ;•  ;ticipation  of  the  collection  of  taxes  or  in 
anticip  ition  of  tlio  receipt  of  as-urcd  revenues  by  any  State, 
county,  district,  political  subdivision  or  municipality  In  the 
continental  United  States,  including  irrigation,  drainage  and 
reclamation  districts,  such  parchases  to  be  made  in  accordance 
with  rules  and  regulations  prescribed  by  the  Federal  Reserve 
Board ; 

(c)  To  purchase  from  member  banks  and  to  sell,  with  or 
without  its  indorsement,  bills  of  exchange  arising  out  of  com- 
mercial transactions,  as  hereinbefore  defined; 

(d)  To  establish  from  time  to  time,  sul)ject  to  review  and 
determination  of  the  Federal  Reserve  Board,  rates  of  discount 
to  be  charjicd  bv  the  Federal  reserve  bank  for  each  class  of 
paper,  whiel)  sh.nU  be  fixed  with  a  view  of  accommodating  com- 
merce and  business ; 

(e)  To  estaljlish  accounts  witli  other  Federal  reserve  ban.  s 
for  exchange  purposes  and,  with  the  consent  of  the  Federal 
Reserve  Board,  to  open  and  maintain  banking  accounts  In 
foreign  countries,  appoint  correspondents,  and  estabhsh  agencies 
in  such  countries  wheresoever  it  may  deem  best  for  the  purpose 
of  purchasing,  selling  and  collecting  bills  of  exchange,  and  to 
buy  and  sell  with  or  without  its  indorsement,  through  such 
correspondents  or  agencies,  bills  of  excLinge  arising  out  of 
actual  conmiercial  transactions  which  have  not  more  than  ninety 
days  to  run  and  which  bear  the  si-^-  ature  of  two  or  more  re- 
sponsible parties. 


.^^^^^.. 


.574 


AITENDIX 


GOVKRyMKNT    DKrOSlTS. 

Sec.  15.  The  moneys  he'd  in  tlic  -general  fund  of  tlic  Trcas- 
nrv,  except  the  five  per  eentuni  fuiul  for  tlic  redemption  of 
outstanding  national-lii-nk  notes  and  the  fund.,  provided  in  this 
Aet  for  the  redemption  of  Federal  reserve  notes  may,  upon  the 
direction  of  the  Secretary  of  the  Treasury,  be  deposited  in 
Federal  reserve  banks,  which  banks,  when  required  by  the  Sec- 
retarv  of  th.e  Treasury,  sliall  act  as  fiscal  agents  of  tlie  T"nit< d 
States;  and  the  revemies  of  tlie  (iovermuent  or  any  part  thereof 
may  be  deposited  in  such  banks,  and  disbursements  m.ay  be  made 
by  checks  drawn  af^ainst  such  deposits. 

No  public  funds  of  the  I'liilip' Mie  Islands,  or  of  the  postal 
•savings,  or  any  government  fluids,  shall  be  deposited  in  th:^  con- 
tinental United  States  mi  .'i-iy  bank  not  Ijilongin^  to  the  system 
established  by  this  Act :  I'rov'uhd,  Jimc-ci'rr,  That  nothin^r  in 
this  Act  shall  be  construed  to  deny  the  ri^ht  of  the  Secretary 
of  the  Treasury  to  use  member  banks  as  depositories. 


XOTK  iss 

Sec.  1().  Federal  reserve  notes,  to  bo  issued  at  the  discretion 
of  the  Federal  Reserve  Board  for  the  purpose  of  makinj^  a<l- 
vances  to  I'ederal  reserve  lianks  throu<rh  the  Federal  reser'-c 
agents  as  luTeinafter  sit  forth  and  *"  )r  no  other  j)iii'pos(,,  are 
henliv  authorized.  The  said  notes  shall  be  oblij^r.itions  of  tiir 
I'nit'.d  States  and  shall  be  receivable  'v  all  national  and  nieni- 
ber  banks  a  '  Federrl  reserve  banks  and  for  all  taxes,  customs 
ami  o'.iier  j)ul)lic  dues.  They  shall  bi'  redeemed  in  <rold  on  de- 
mand at  the  Treasury  Depariment  of  the  T'^nited  States,  m 
the  cit\  of  ^Vasbinffton,  District  of  Coluinlila,  or  in  fjoid  or 
lawful  money  at   any  Icdcral   re>erve  bank. 

Any  Federal  reserve  bank  may  make  n])plication  to  the  Inrnl 
Federal  reserve  afrcnt  for  sucli  amoimt  of  the  I'ederal  reserve 
notes  hereinbefore  prov'd-d  for  as  it  may  re(|uire.  Sik  li  appli- 
cation sliaii  lie  i  pnnied  with  a  tender  to  i  f  i-  local  i.iii  rai 
reserve  .ayenl   oi    ,-■   Uicral    m  amount  e<iual  to  the  sum  of   the 


APPENDIX 


OiO 


KiiKral  reserve  n 
surh    application. 


Acs  tlui>  ajjplied   for  and  i>.su(({  pursuant    to 
The    collateral    security    tluis    otFered    shall 


cepteil  for  rediscount  undi  r  the  provisions 
'„f  section  thirteen  of  this  Act,  and  the  Federal  reserve  agent 
>h,ill  each  day  notify  the  Federal  Reserve  Board  of  all  issues 
;.:ui  withdrawals  of  Federal  reserve  notes  to  and  hy  the  Inderal 
n.,erve  hank  to  which  he  is  accredited.  Tlu-  said  Federal  Re- 
serve Board  niav  at  any  time  call  upon  a  Fcl.ral  reserve  bank 
for   ad.'itional    security    to    protect   the    Federal    reserve  notes 

issuetl  to  it. 

Fvery  Federal  reserve  hank  shall   maintain   reserves   ni  gold 
or  lawful  money  of  not  less  than  thirty-fivr  p.r  cm, turn  against 
it>   deposits   and   reserves    in    gold   of   not   K  >>   Wv.n    forty    per 
or.tum  against  its  Federal  reserve  notes  in   actual  circulation, 
;m,l  not  offset  hv  gold  or  lawful  money  deposited  with  th.    Fed- 
.ral    reserve  agent.      Notrs   so    paid   out    shall   hear   ui)on    their 
faces  a  distinctive  letter  and  srrial   nu.nl)er.  which  sliall  he  as- 
signed hv  the  Federal   Reserve  Hoanl   t.,  ...•h   ]■ ,  (hral   ivMrvc 
hfuik.      Whenever  Federal  rrserve  notes  issued  through  one  Fed- 
eral reserve  hank  shall  l)e  r.cix.d  l.y   another  Federal  reserve 
hank  the,    shall  he  promptly  refurm.l  f.)r  credit  or  redemption 
to  the  I'edend  resir\r  hank  through  which  they  were  originally 
issued.      No   Federal    r.s.rve   hank    shall    pay    ovit   notes   issuea 
fhrough  another  under  penalty  of  a  tax  of  ten  per  centum  Uj.on 
\\h'  face  xalue  of  notes  so  pai.l  out.      Notes  presented  for  re- 
,i,M„ption   at   the  Trra  ury  of  th-.-  Fnited   States  shall  he  paid 
out  of  the  redemption  fund  and  returne.l  to  the  Federal  reserve 
h.mks  thr.nigh  which  they  wen'  originally  issued,  and  thereupon 
such  Fedeial  reserve  hank  shall,  upon  demand  of  the  Secretary 
of   the   Trea.sury.    rcimhursc    such    r(<irniplIon    f   nd    in    lawful 
money  or,  if  such  F.-Lral  r.s.rve  not.s  have  h-m   re.l.rna.l  hy 
the  Treasunr  in  gold  or  gol.l  certificates,  then  such  funds  shall 
l.r  reimimrsid  to  the  extent  deemed  nocrssary  hy  the  Secretary 
of  the  Treasury  in  gold  or  gohl  certificates,  and  such  Federal 

nsorve  hank  shall,  so  loTig  as  anv   of  its  Federal   reserve  notes 

_  _   •  11.... 

rein.nn    (>ut>tan(hng.    mamiam    »iiii    ii'e     i  re, -.,;;,,  .    ;t;    ^-:;-.:    .-.:: 

■unount    sufHcient   in  tiie  .judgment    of  the  Secretary   to  provide 


J  7  (5 


APPEXDIX 


4 


:J1 


for  all  rcdtniptions  to  he  made  hy  tlie  Treasurer.  Federal  re- 
serve notes  received  by  tlie  Treasury,  otherwise  than  for  re- 
demption, may  he  exchanged  for  gold  out  of  the  redemption 
fund  lieniiiafter  provided  and  r.tunird  to  the  re.ser  -  hank 
througli  which  they  were  originally  issued,  or  they  ma  he  re- 
turned to  such  hank  for  the  credit  of  the  Ignited  States.  F(.i- 
eral  reserve  notes  unfit  for  circulation  shall  he  returned  hy  the 
I'Vdcral  reserve  agetits  to  the  Comptroller  of  tiie  Currency  for 
cancellation  and  destruction. 

The  Federal  Reserve  Board  shall  require  each  Federal  reserve 
l)ank   to    maintain    on    deposit   in    the   Treasury    of    the    I'nlt.d 
States  a  sum  in  gold  suflicient  in  the  judgment  of  the  Secretary 
of  the  Treasury  for  the  redemption  of  the  Federal  reserve  tiotes 
issued  to  such  hank,  hut  In  no  event  less  than  five  per  centum; 
but  such  deposit  of  gnjd  shall  he  count,  .1  and   Included  as  part 
of  the    forty   per   centum    reserve   hereIni)efore   recjulred.      'I'he 
hoard  shall  have  the  right,  acting  through  the  Fechral  reserve 
agent,  to  grant    in   whole  or  in   part   or   to  reject   entirelv  the 
aj)plication   of   any    Federal    reserve   hank    for   Federal   reserve 
notes;  !)ut   to  the  extent  that   such  application   may  he  granted 
*!h'  F((I,ral  Ii,s,.n,.  Hoard  sjiall,  (hrongh   its  local   I'ederal  re- 
serve agent,  suppiv  l-'ed.'ral  reserve  not.s  to  the  hank  so  applv- 
ing,  and  such  l)ank  shall  he  charged  with  the  amount  of  su.  h 
notes  and  shall   i)ay  such   rate  of  interest  on   sal.l   amount   as 
may    he    established    hv    the    Federal    Reserve    Ro/ird,    and    the 
amount   of  such   I'.deml  reserve  notes   so   issued   to  anv  .such 
I-ank   shall,   upon    d.  liv.  ry,    together   with    such    notes    of  such 
F((leral   reserve  bank  as  may  be   issued   uiirl.  r  s,.,fi,,n   eighteen 
of  this  Act  upon  security  of  Fnited  Stales  f«„  p.r  centum  (lov 
'^rnmcnt  bonds,  become  a  first  ami   paramount  lien   on  all   the 
assets  of  such  hank. 

Any  Fcfieral  reserve  bank  may  at  any  time  reduce  Its  lia- 
bility for  outstanding  Federal  reserve  notes  by  depositing,  with 
the  Federal  reserve  agent,  its  Federal  reserve  notes,  gold,  g.)ld 
certificates,  or  lawful  money  of  the  Fnited  States.  F.d.r.d 
rcscrvp  notc-s  no  deposited  shall  not  he  r.issucd,  excejjt  upon 
complian.e  with  the  conditions  of  un  original  issue. 


ArPENDIX 


^(  I 


The  Federal  reserve  agent  shall  hold  such  ffold.  gold  cer- 
tificates, or  lawful  nionoy  iivailable  exclusively  for  excliaii<i;e  for 
t,  outstanding;  I'edcral  reserve  notes  when  offered  by  the  re- 
MTve  bani;  of  which  he  is  a  director.  Upon  the  request  of  the 
Secretary  of  the  Treasury  the  Federal  Ilcserve  Board  shall 
require  the  Federal  reserve  agent  to  transmit  so  nuich  of  said 
gold  to  the  Treasury  of  tlie  United  States  as  may  be  reiiuircd 
for  the  exclusive  purpose  of  the  redemption  of  such  notes. 

Anv  Federal  reserve  hank  may  at  its  discretion  withdraw 
collateral  deposit. d  will,  the  local  FetKral  reserve  agent  for  the 
protection  of  its  Federal  reserve  notes  deposited  with  it  and 
>hall  at  the  same  time  substitute  therefor  otiier  like  collateral  of 
.,,ual  amount  with  the  approval  of  the  Federal  reserve  agent 
under    regulations    to    Lj    prescribed    by    the    Federal    Resei-\e 

Hoard. 

In  order  to  furnish  suital)le  note^  for  circulation  as  Federal 
rescr^-e  notes,  the  Coniptn.lK  r  oi  the  Currency  shall,  under 
the  direction  of  the  Secretary  of  (lie  Treasury,  cause  plaies  and 
(lies  to  be  engraved  in  the  best  manmr  to  guard  against  counter- 
feits and  fraudulent  alteration  ,  and  shall  'oavo  printed  there- 
from an.l  numbered  such  (inantities  of  sucli  note,  of  the  drnom- 
inations  of  .f.',,  ^10,  ^^li\  $')0,  $100,  as  m  ly  be  re.|uired  to  sup- 
ply the  Federal  reserve  banks.  Such  notes  shall  be  in  form 
and  tenor  as  directed  bv  the  Secret  y  of  the  Treasury  under 
the  provisions  of  this  Act  and  shall  b.ar  the  distinctive  num- 
bers of  the  several  Federal  reserve   banks   through  -vliieh  they 

are  issued. 

When  such  notes  have  been  prepared,  they  shall  be  deposited 

n   tlu'  Treasurv,  or  in    (he  subtreasury  or  mint  of  the   I'nited 

States  nearest  the  place  of  business  of  each  Federal  reserve  bank 

and  shall  be  held  for  tlie  use  of  such  bank  subje.-t  to  the  order 

of  the  Comptroll.r  of  the  Currency   for  tlieir  delivery,  a>  pn.- 

Mded  bv  this  Act. 

The  plates  and  dies  to  be  prnmred  by  the  Comptrnller  of  the 
Currency  for  tlie  printing  of  sudi  circulating  notes  shall  remain 
nnd.T  his  control  and  direction,  and  the  expenses  necessarily 
incurred  in   executing   the  laws    relating   to   the    procuring   of 


hJ^'"  * 


APPENDIX 


such  notes,  and  .ill  other  expenses  incidental  to  their  issue  and 
retirement,  shall  i)e  paid  hy  the  i'ederal  reser\  ■  lianks,  and  the 
Federal  Reserve  Board  '■  U  include  in  its  cstlmale  of  expenses 
levied  against   the  I'ed  reserve  banks  a  sufficient  amount  to 

cover  the  expenses  hcrem  provided  for. 

'i'he  examination  of  plates,  dies,  hed  pieces  and  sn  foi  Ih.  and 
re.f^ulations  relatintj  to  such  examination  of  plate>,  dii-'  and  so 
forth,  of  national-hank  notes  provided  for  in  section  fifty-one 
liuiuiixl  and  .>iventy-four  llc.vix'd  Statutes,  is  hereijy  extended 
to  include  notes  In nin  provided  for. 

Any  appropriation  heretofore  made  nut  of  the  fjeneral  funds 

of  the  Treasury   for  engravinjj;  plates   and   dii  s,    the   purchase 

of  distinctive  paper,  or  to  cover  any  other  expense  in  connection 

"ith  the  printing;  of  national-hank  notes  or  notes  provided  for 

liv   the   Act   (>f  Alav   tlilrlicth,   nlintcrn   hmidnd  and   ci;:^]!!.  .iiid 

aii\    distinctive  jiaper  that  may  he  on  hand   at    the   time   of  the 

])assa^c  (if  this    \(t   may  he  u^cd  in  the  discretion  of  the  Secre- 

tarv  for  t!ic  |)iir|)oses  of  this  Act.  and  slioidd  the  appropriation- 

heretofore  m  nic  he  insufficient  to  met  t  the  retjuirements  of  tin- 

Act    in    addilinn    to  clrculat  in;j;    noli  s   provided    for  hy    exlstinfi 

law.  the  Secretarv   is  lu'rehy  authorized   to  use  so   much  of  an\ 

funds  in  the  Treasury  not  otherwise  appropi  i.ited  for  the  j)nr 

pose  of  furnishinir  the  notes  aforesaid:  I'nn'i(Ui'i.  Iimcircr.  Tli.i 

nothin^j,-  in  this  section  contamed  shall  he  construed  as  ex(  nipt 

In^  national  hanks  or  Federal  reserve  hanks  from  tlieir  liabilit; 

to   reimburse   the  I'niled    States    for  any   expenses   incurred   ii 

printiufif  and  issuing  circula!  inu,-  notes. 

I'verv  Federal  reserve  hank  shall  receive  on  deposit  at  pa 
from  member  banks  or  from  Federal  reserve  banks  checks  am 
drafts  drawn  upon  any  of  its  depositors,  ami  when  remitted  h 
a  Federal  reserve  l)ank,  checks  and  drafts  drawn  hy  any  deposi 
t(u-  in  anv  (>ther  I'ederal  reserve  hank  or  member  bank  upo 
funds  lo  the  credit  of  said  depositor  in  said  reserve  bank  o 
member  bank.  Nothinfr  herein  contain- d  shall  be  construe 
ft.:  nrolnbiti'ifr  fi  me'iiber  bank  from  diaruinff  its  actual  expens 
incurred  in  collecting  and  remittin<;  funds,  or  for  exclmnere  sol 
to  its  patrons.     The  Federal  Idscrvc  Board  shall,  i)y  rule,  fi 


ATTKAniX 


579 


issue  .ii'.il 

,  Jiiul  the 

cxptiiM  ^ 

mount  to 

oilli.  and 

liftv-Dllr 

oxtcndtil 

M'al  funds 

purclia  1' 

•otinection 

)vi(lccl  for 

lUC     of    till' 

the  Sccrc- 
opriatioii> 
its  of  tlii> 
y  cxlstlni; 
icli  of  an V 
r  tlic  ))ur- 
cirr.  That 
IS  exi'nipt 
ir  liiihility 
iicurrcd   in 

isit  at  par 
checks  and 
oniitfrd  I)y 
iny  doposi- 

liank  iijion 
e  liank  or 
const  nicd 
ml  oxponsr 
luin<fo  sold 
)V  ruK',  (i\ 


thr  charirrcs  to  1)C  collccti'd  liy  thr  ni'jnil)cr  hanks  from  its  j)a- 
tnin>  whose  checks  arc  cleared  through  tiie  Federal  reserve  l)ank 
,111(1  the  char<;e  which  may  he  imposed  ior  tlie  service  of  clearing 
or  collection   rendereil  hy  the   Federal  reserve  l)ank. 

Tiie  Federal  Jlescrvc  Board  shall  make  and  promulgate  from 
time  to  time  re<;ulations  jroverning  the  transfer  of  funds  and 
cliarfTcs  therefor  among  Federal  reserve  hanks  and  tiicir 
I, ranches,  and  may  at  its  discretion  exercise  the  functions  of  a 
charing  house  for  such  Federal  reserve  hanks,  or  may  desig- 
nate a  Federal  reserve  haiJv  to  exercise  >uch  functions,  and  may 
,.!>o  re(iuire  eacli  such  hank  to  exercise  the  functions  of  a  clear- 
ing house  for  it-   memher  hanks. 

Sec.  17.  So  n.uch  of  the  j)rovisions  of  section  fifty-one  hun- 
dred and  fifty-nine  of  tlie  Revised  Statutes  of  the  United  States, 
and  section  four  of  the  Act  of  dune  tucntieth.  eighteen  liundred 
and  .seventy-four,  and  section  ciglit  of  tile  Act  of  July  twelflh, 
(ightcen  hundred  an<l  eighty-two.  and  of  any  other  j)rovisions 
of  existing  statutes  as  reciuire  that  hrfore  any  national  hank- 
ing associations  shall  he  authorized  to  conmience  hanking  husi- 
n.'ss  it  shall  transfrr  and  deliver  to  llu'  'I'reasun  r  .if  the  Fnitrd 
Ni  ,to.  a  stat.d  amount  of  United  States  registered  bonds  is 
hereby  repealed. 

RKFUMUNi-    ilONUS. 

Sec.  is.  Aftor  \\\<<  \>:i\-  from  the  jiassagr  of  this  Act.  .^nd  at 
aiiv  time  during  i  jn  riod  of  twmty  \  <'.irs  thereafter,  any  niem- 
lur  bunk  desiring  to  retire  the  whole  or  any  part  of  its  circu- 
Ming  notes,  may  file  with  the  Treasurer  of  the  United  Stales  mi 
application  to  s.  11  for  its  accoimt.  at  par  and  accrued  interest, 
Fnited  States  iiMud-  securing  circulation  to  he  r.  tired. 

Thr  Treasur.  r   shall,   at    tho   em!    of  each   (piartorly    period, 
furnish  the  F.d.r.d  H(-erve  Board  with  .i  h>t   of  such  applica- 
tions, and    the    Federal  Reserve   Board    may,   in    its   discretion. 
!(!uirc  the  Federnl  reserve  hanks  to  i)urchas.>  such  honds  from 
•  .■  banks  whose  applications  have  been  filed  \Nith  thr  'I'rr.isunr 
;    least   ten   d.iys    hefurr   the  end    of  any   tpia'-terly    prriod  at 


:>so 


AJ'PENDTX 


wliirli  the  Ferlcral  Reserve  Roiinl  may  direct  the  purchase  to  t 
iiiadr:  Proridcd  That  Federal  reserve  hanks  sliall  not  he  pei 
niittid  to  purcliasc  an  amount  to  exceed  ^!.'.").()0(),()()()  of  sue 
hoiids  in  ;iny  one  year,  and  '.vliich  amount,  shall  include  i)oncl 
actjuired  under  section  four  of  this  Act  liy  the  Federal  reserv 
bank. 

Providr,]  f/irtlicr.  That  the  Federal  Reserve  Roard  sliall  alle 
to  eacli  IVdcral  res.  rve  hank  sUi'h  proportion  of  such  hond 
as  the  capital  and  ^urphis  of  such  hank  shall  hcai-  to  the  aii-<.T(. 
^ate  capital  and  siiri)Ius  of  all  the  I'l'deral  reserve  hanks. 

I  pon  noti(  fi-oni  the  Treasurer  of  the  aiununt  of  hone's  s 
sold  for  its  account,  eacli  memlur  hank  shall  dulv  assio-n  aii 
transfer,  in  wi-itinif.  such  bonds  to  tlic  Federal  reserve  ban 
purchasliio-  flu.  same,  and  such  I'ederal  reserve  bank  shall,  there 
upon,  di  pdsit  liwful  money  with  the  Treasurer  of  flie  Fnitei 
States  f(ir  III,,  pui-ehase  j)rice  of  such  bonds,  and  the  Treasure 
shall  pay  (o  the  member  hank  selling-  .sUch  bonds  anv  balaiu' 
due  after  (Kchu'tinLj  a  sufficient  sum  to  redeem  its  outstanding 
notes--  secm-ed  by  Mich  I'luids.  uiiich  notes  shall  be  canceled  am 
jH-rnianently   retired   when   redeiined. 

'I  he  Inderal  r  serve  banks  purchasinf^'  ^neh  bonds  sliall  h 
permitted  to  take  out  ail  amount  of  cireulat inj^f  notes  equal  ti 
the  jiar  \ahie  of  such  bdiid-. 

Fpoii  the  dej)osit  with  thi'  Treasurer  of  the  T'nited  Stat(\s  o 
bonds  so  jmrchased.  or  any  bonds  \v]t\\  \]\n  circulat in;^-  jiriviletri 
aetMiii-rd  under  s,,'!,,,,,  f,,ur  of  this  Act.  anv  Fefleral  reservi 
I  ank  making;  such  deposit  in  the  manner  j)rovi(led  by  existinr 
l.'iu.  sh.ill  be  entitled  tr)  reccive  from  the  {'oinptioHer  of  tin 
Currency  i  n-ciilai  in^r-  notes  in  blank,  re^^-istered  and  counter 
sifjned  as  prn\  idrd  by  law.  «(|ud  in  amount  to  the  par  value  ol 
the  )>onds  so  deposited.  Such  notes  shall  be  the  oblij^^it  ion- 
of  the  Federal  reserve  bank  procuriiio-  the  same,  and  siiail  l)c  ir 
form  prescribed  by  the  Secnt.iiy  of  the  Treasurv.  and  to  th( 
same  tenor  and  effect  as  national-bank  notes  now  provided  1)\ 
lau.  rh.ey  shall  be  issudi  and  redee-n,.(|  under  the  same  lerni> 
and  conditions  as   national-bunk   ii!){e.s   except   that  they   i.h 


Iial 


APPENDIX 


581 


chase  to  he 
lot  he  piT- 
)()  of  such 
iudc  I)(iii(is 
ral  resLTvi; 

sliall  allot 
lU'h  hoiiiis 
the  aii-n-rc- 
nks. 

f  h()ii('s  so 
issiu'ii  ami 
uTve  hank 
hall,  then - 
tho  T'nitrd 
'l'r('a>iir(  ]• 
i_v  i>alaiici' 
1 1 1  s  t  a  n  ( 1 1 M  l;- 
iitek'd  ami 

Is  shall  h." 
s  (.'(jiial  to 

I  States  of 
;■  prlvilcov 
•al  icscrsi' 
y  (.'xistin^;' 
Irr  of  tli- 
I  Colilltcl'- 
r  \alii('  (if 
il)li<;'at  ions 
sIkiII  he  Hi 
mil  to  thr 
oviilcd  hv 
lino  tl•I■!n^ 
thev    .-hall 


I 


:    I  \h-  limited  to  the  amount  uf  tho  capitai  stock  of  the  I'ldcral 
ri>ciVL'  hank  issuing  tlnin. 

I'pon    application    of   any    Federal    reserve    l)aiik,   approved 
I)y  the  Federal  Reserve  Hoard,  the  Seeretary  of  the  Treasury 
may  issue,  in  exelianpfc  for  I'nited  States  two  per  centum  <i'old 
bonds  bearing  the   circulation   privilege,  hut    against   which  no 
ciieulation   is   outstanding,   one-year  gold   notes   of   the  I  nited 
States   without    tlie   I'irculatiou    i)!-|vllegc,   to  an   amount  not   to 
exceed  one-half  of  the  *^wo   per  cei.lum  Ijonds   so    lendend   for 
exchange,  and  thirty-year  three  ])er  centum  gold  homls  without 
the  circulation  privilege  for  the  remainder  of  the  two  per  centum 
lionds  so  temlered:  I'rorhlal.  'I"liat  at  the  time  of  such  CAchange 
llie    Federal    reserve   hank    ohtaining   such    one-year   gold    notes 
-!i:ill  enter  into  an  ohligation  with  the  Secrt'tary  of  the  Treas- 
i!'v  hinding  itself  to  })urchase  froui  the  United  States  for  gold 
at    the  maturity  of  such  one-year   notes,   an   amount    ((jual    to 
those  delivered  in  exchange  for  such  ixmds,  if  so   re(iuested  hy 
I'nr  Secretarv.   and   at   eai'h  maturity   of  one-year  notes   so  pur- 
.  hased    hv    -uch    I'ederal    reserve    hank,    to    pnrchaM'    from    the 
I   nited  States   such  an   amount    of  one-year  notes  as  the   Secre- 
i  irv  may  tiiuh  r  to  such  hank,  not  to  exceed  the  amount  issued 
to  such  hank   in  the  first  instance,  in  exchange  for  the  two  per 
centum   I'nited  States   gold   hdncU  :  said   ohlin'ation    to  ))urchase 
al   maturity  such  m)te>  shall  continue  in  force  for  a  period  not 
to  excel  (1  thirty  years. 

For  the  i)urpose  of  making  the  exchange  herein  provided  for, 
Ihe  Si'cretai-.  of  the  Treasury  is  authorized  to  issue  at  j)ar 
'i'reasurv  notes  in  couj)oii  or  registered  form  as  he  may  pre- 
-erlhe  in  denomination-.^  of  one  hundred  dollars,  or  any  imilti[)lo 
thereof,   heariui;-   interest    at    the   rate    of   thne   pn-   e.  ntuin    per 

tinum.  payahle  (juarterly,  such  Treastn-y  notes  to  he  ])ayalile 
not  more  than  os.-  y^'ar  from  tlie  date  of  their  issue  in  gold 
coin  of  the  i)resent  standard  value,  ami  to  be  exempt  n.s  to 
principal  and  interest    from  the  payment  of  all  taxes  and  duties 

•    111  I  1     ■  4         I  ,  -,       II 

lUeii    liV     Tlii:-     .\i":,     -i-     **.  vi; 


U    tlie    «    mied    rMale 


»roviti 


f 


IS  I  rom 


tax. 


{• 


IS  m  anv  lorm  tiv  or  under 


le.  nninicipal  or  local 
lulhorities.      And    for   the  same   purpose,  the  Secretary   is   aii- 


r,Hi 


APPENDIX 


thorizcd  and  empowered  to  issue  T'luted  States  gold  bonds  a 
par,  lKariii<r  three  per  centum  interest  pavahk'  tliirty  year 
from  (late  of  issue,  such  boiuls  to  be  of  the  same  (General  teno 
and  effect  and  to  be  i^suid  under  the  same  oi.nera!  terms  am 
conditions  as  the  Tnited  State-,  three  per  centum  lionds  withuu 
the  circuhition  privile<ro  now  isMied  ,!  id  .)ut^tan(lin>4•. 

Upon  apph'cation  of  any  Ftihral  .eserve  bank,  approved  h\ 
the  Federal  Keserve  Hoai'd,  the  Secretary  may  issue  at  par  sucl 
three  per  centum  bond*  in  exchange  for  the  one-year  gold  note: 
herein  provided  for. 


BANK    RESERVES. 

Sec.  19.  Demand  dep(j>its  witliiti  the  nuaninrr  of  this  Ad 
shall  com]»rise  all  deposits  payal)le  within  thirty  dav>.  and  tinii 
deposits  shall  comprise  all  depoMts  payaide  after  tliirtv  davs, 
and  all  savings  accounts  and  c(  rtificato  (,i'  deposit  which  an 
subject  to  not  less  than  thirty  days'  notice  before  ])avmeiit. 

When  the  Secretary  of  the  Treasury  shall  have  otticially  an- 
nounced, in  such  manner  as  h,'  may  i  lect,  the  establishment  of  ;i 
Federal  reserve  bank  in  any  district,  every  subscribing  nienibei 
bank  shall  establish  and  maintain   nservis  as  follows: 

(a)  A  bank  not  in  a  reserve  or  central  reserve  city  as  now 
or  hereafter  defined  shall  hold  and  maintain  reserves  etpial  to 
twelve  per  centum  of  the  aggregate  amount  of  its  demand  de- 
posits and  five  per  centum  of  its  f  ime  deposits,  as  follows: 

In  its  vaults  for  ;i  period  of  thirty-six  months  after  said  date 
five-twelfths   thereof  and    permanently   thereafter    four-twelfths. 

In  the  Federal  reserve  bank  of  its  district,  for  a  j)eriod  of 
twelve  mo:dhs  .after  said  date,  two-twelfths,  and  for  each  suc- 
ceeding six  inoidhs  an  additional  one-twelfth,  until  five-twelfths 
have  been  so  defjosited,  which  shall  l)e  the  amount  permaneiitiv 
reipiired. 

I-or  a  perl()('  of  thirty-six  months  after  said  date  the  balance 

of     flio      ..,,. 1  111      •  •.  ,.  .  .  .  .j_.        .  . 

•'""  "•••."•  '■■"  •■-'•••  •''  '•■'  ■"■";;  ■  auus,  ui'  m  li.-  rederai 
reserve  l)nnk,  or  in  national  banks  ;a  reserve  or  central  .serve 
cities  as  now  defined  l)v  law. 


APPENDIX 


58.*^ 


I  bonds  ut 
irty  jL'iirs 
icral  tuiior 
terms  hirI 
l!s  without 

proved  l)v 
t  p;ir  such 
gold  notes 


'  tliis  Art 
.  ;uid  tiiin' 
irtv  (i:i\-, 
whicli  ai'i' 
.Muent. 
ieially  an- 
iiiient  of  a 
g  member 

y  as  now 
efjual  til 
■mand  de- 
)ws : 
said  date 
•-twrlftlis. 
})eri()d  of 
eacli  siic- 
L'-twelfths 
•marientlv 

e  balance 

'   i''i'(i(  rai 

ui   .  •  serve 


After  said  thirty-six  months  perioci  said  reserves,  other  tlian 
tliuse  liereinljefori'  recjuired  to  be  held  in  the  vavdts  of  the  meni- 
liir  bank  and  in  tiie  Federal  re;,erve  bank,  shall  l)e  held  in  the 
\aults  of  the  member  bank  or  in  the  Federal  reserve  bank,  or  in 
liith,  at  the  option  of  the  member  l)ank. 

(b)  A  bank  in  a  reserve  city,  as  now  or  hereafter  denned, 
vhail  hold  and  maintain  reserves  equal  to  fifteen  per  centum  of 
(lie.  a'-^'fre'-'-ate  amount  of  its  demand  deposits  and  ti'e  per  centum 
(if  its  time  deposits,  as  follows: 

In  its  vaults  for  a  period  of  thirty-six  months  after  said  date 
six-fifteenths  thereof,  and  permanently  thereafter  five-fifteenths. 
In  the  Federal  reserve  bank  of  its  district  for  a  period  of 
twelve  months  after  the  date  aforesaid  at  least  three-fifteenths, 
and  for  each  succeedinn;  six  months  an  additional  one-fifteenth, 
until  six-fifteenths  have  b.en  so  deposited,  which  shall  be  the 
amount  permanently  required. 

For  a  period  of  thi^ty-^i\  months  after  said  date  tlie  balance 
of  the  reserves  may  be  held  in  its  own  vaults,  or  in  the  Fetleral 
reserve  bank,  or  in  national  banks  in  reserve  or  central  reserve 
cit'es  as  now  defined  by  law. 

After  said  thirty-six  months'  period  all  of  said  reserves,  ex- 
cept those  hereinbefore  required  to  be  luld  pennancntly  in  tiie 
vaults  of  the  member  bank  and  in  the  Federal  reserve  bank,  shall 
i>e  lield  in  its  vaults  or  in  the  Federal  reserve  bank,  or  In  both, 
at  the  option  of  the  member  bank, 

(c)    A  bank    in   a   central   reserve   city,  as  now   or  hereafter 
defined,  shall  hold  and  maintain  a  reserve  eciual  to  eighteen   per 
centum  of  Die  agj^^re^ate  amount  of  its  demand  deposits  and  five 
per  centum  of  its  time  deposits,  as  follows: 
In  its  vaults  six-eighteenths  thereof. 
In  the  Federal  reserve  bank  scven-cio-htcentlis. 
The  balance  of  said    reserves  shall   be  luld  in  its  own  vaults 
or  in  the  Federal  reserve  bank,  at  its  option. 

Any    Federal    resei-ve   bank   may    receive    from   the   member 

.     '  ■         ,.  i;.,    _     ^I...lf     ,,f     «.i/^l.     iiwf  ulllllcnf . 

hanks    as     i  i -ni  v"i .-,,    noi    crxicei::::^    •,•::-.    ::•.::    --t 

eligible    paper    as    described    in    section    fourteen    properly    In- 
dorsed and  acceptable  to  the  said  reserve  bank. 


584 


APPENDIX 


If  a  State  .)ahk  or  trust  coinpaMv  Is  required  hv  tlic  law  of 
Its   Statr  t,.   keep  its    reserves  eitlar  in    its  own  vaults  or  with 
anotl.er  State  bank  or  trust  ro,„pany,  such  reserve  deposits  so 
kept  HI  such  State  Link  or  trust  eoinpany  shall  be  eoustrued, 
«itiiiu   the  Hieaninn.  uf   this  section,  as  if  they  were   reserve  de- 
posits in  a  national  bank  in  a  reserve  or  central   reserve  city 
for  a  penod  of  three  years  after  the  Secretary  of  the  Treasury 
shall  have   officially  announced   the   establishment  of  a  Federil 
reserve  bank  in  the  district  in  which  such  State  bank  or  tru>f 
company  is  situated.      Kxcept  as  thus  provi.led,  no  member  bank 
sliail  keep  on  deposit  with  any  nonmember  bank  a  sum  in  excess 
of  ten  per  centum  of  its  own  paid-up  capital  and  surplus.      No 
"u.mber  bank  shall  act  as  the  medium  or  a-ent  of  a  nonmember 
hank  m  ap})ly,ns  for  or   receiving  discounts  from  the  Federal 
reserve  bank  under  fl,e  provisions  of  this  Act       .:cpt  by  permis- 
sion of  the  Federal  IN  serve  Poard. 

The  reserve  carried  by  a  m..nil)or  liank  with  a  Federal  re- 
serve bank  m.-.y,  under  the  re,<,ndations  aiul  subject  to  such 
penalties  as  may  b,"  prescri!,ed  by  the  Federal  Reserve  Poard,  be 
checked  a-ainst  arul  withdrawn  by  such  member  bank  for  the 
purpose  of  meetin-  existing?  liabilities:  Provided,  horvevcr.  That 
no  bank  shall  at  any  time  make  new  le)ans  or  shall  pay  any 
dividends  unless  and  until  tlie  total  reserve  required  by  Liw  is 
fully  restored. 

In  estimatincn  the  reserves  required  by  tliis  Act,  the  net 
I)alance  of  amounts  du..  to  and  from  other'banks  sliall  be  taken 
as  the  basis  for  ascertaininir  the  deposits  against  wliich  rcser^-es 
shall  be  determined.  Pa  lances  In  reserve  banks  due  to  member 
I'.u.ks  sliall,  to  the  extent  lierein  providod,  be  counted  as  re- 
serves. 

^  National  banks  located  In  Alaska  or  outside  the  continental 
United  States  may  remain  nonmember  banks,  and  shall  in  that 
event  maintain  reserves  an<l  comply  with  all  the  conditions  now 
provided  by  Ia^v  reerulatln^-  tliem:  or  said  banks.  oxa^Y-k  '■"  the 
Pliilippinc  Islands,  may,  witli  the  consent  of  the  Reserve  Board, 
1  eeome  member  banks  of  any  one  of  the  reserve  districts,  and 


V 


APPFA'DIX 


585 


>liall,  in  that  event,  take  stock,  uiaintain  reserves,  and  bo  sul)j(Tt 
tt)  all  the  other  provisions  of  this  Act. 

Sec.  20.  So  much  of  sections  two  and  three  of  tlie  Act  of 
.Tune  twentieth,  eighteen  hundred  and  seventy-four,  entitled 
••  An  Act  fixing  the  anieunt  of  United  States  notes,  providing 
for  a  redistribution  of  tlie  national-bank  currency,  and  for 
other  purposes,"  as  provides  that  the  fund  dep>  ted  by  any 
national  banking  association  with  the  Treasurer  of  the  United 
States  for  the  redemption  of  its  notes  shall  l)e  counted  a^  a 
part,  of  its  lawful  reserve  as  provided  In  the  Act  aforesaid.  Is 
hereby  repealed.  And  from  and  after  the  passage  of  tlils  .\ct 
^uch  fund  of  five  per  centmu  slr.ill  in  no  case  be  counted  by 
any  national  banking  association  as  a  part  of  its  lawful  reserve. 


BAKK    F.XAMINATIOXS. 

Sec.  21.   Section  fifty-two  hundred  and  forty,  United  States 
Revised  Statutes,  Is  amended  to  read  as  follows : 

The  Comptroller  of  the  Currency,  with  the  approval  of  tlic 
Secretary  of  the  Treasury,  shall  appoint  examiners  who  shall 
exan.ine   every   member   bank   at   least   twice    in    each    calendar 
year  and  oftcner  If  considered  necessary:   Pruvidcil   horci-irr, 
'Fhat  the  Federal  Reserve  Board  may  authorize  examination  by 
tlie  State  authorities  to  be  accepted  In  the  case  of  State  banks 
and  trust  companies  and  may  at  any  time  direct  the  holding  of 
a  special  examination  of  State  banks  or  trust  companies  that 
are  stockholders  in  any  Federal  reserve  bank.      The  examiner 
making  the  examination  of  any  national  bank,  or  of  any  other 
inemhcT  bank,  shall  have  power  to  make  a  thorough  examination 
of  all  the  affairs  of  the  bank  and  In  doing  so  he  shall  have  jiow.r 
to  administer  oaths  and  to  examine  any  of  the  officers  and  agents 
thereof  under  oath  and  shall   make  a  full  ;ui.]   detailed   report 
of  the  condition  of  said  bank  to  the  Comptroller  of  the  Currency. 
The  Federal   Reserve   Board,   upon   the   recommendation   of 

•     .  .  ^.  _  1       1!      n..     tl...     ...1..  i-Ii^c      (if     .ill 

tile   Coinpi  roiiei    ui    tiie   v  rrrrcnrv,   :■;;;;;;    .:■' 

bank  examiners  and  make  report  thereof  to  Congress.      The  ex- 
pense of  the  examinations  iiereln  provided  for  shall  be  assessed 


?■ 


-)S(; 


Al'ri'.NDTX 


])\  the  Comptroller  of  tiio  Ciirroncy  upon  the  hanks  examined  In 
proportion  to  assets  or  resources  held  hy  the  banks  upon  the 
dates  of  examination  of  the  various  banks. 

In  addition  to  the  examinations  njade  and  conducted  bv  tli." 
Comjitroller  of  the  Currency,  every  Federal  reserve  bank  ma\, 
with  the  approval  of  the  Federal  reserve  agent  or  the  Federal 
Reserve  Hoard,  provide  for  special  examination  of  member 
banks  within  its  district.  The  expense  of  such  examinations 
sliall  be  borne  by  the  bank  examined.  Such  examiiuitions  shall 
he  so  conducted  as  to  inform  the  Federal  reserve  bank  of  the 
condition  of  its  member  banks  and  of  the  lines  of  credit  which 
are  being  extended  by  them.  F.very  I'ederal  reserve  bank  shall 
at  all  times  furnish  to  the  Federal  Reserve  Board  such  infon-vi- 
tion  as  may  be  demanded  concerning  the  condition  of  any  mem- 
ber bank  within  the  district  of  the  said  Federal  reserve  bank. 

No  bank  shall  be  subject  to  any  visitatorial  powers  other 
than  such  as  are  authorized  by  law,  or  vested  in  the  courts  of 
justice  or  such  as  shall  be  or  shall  liave  been  exercised  or  di- 
rected by  Congress,  or  by  either  House  thereof  or  by  any  com- 
mittee of  Congress  or  of  either  House  duly  authorized. 

The  I'ederal  Reserve  Board  shall,  at  least  once  each  year, 
order  an  examination  of  each  Federal  reserve  bank,  and  upon 
joint  application  of  ten  member  banks  the  Federal  Reserve 
Board  shall  order  a  special  examination  and  report,  of  the  con- 
d'tion  of  any  F'ederal  reserve  bank. 

Sec.  22.  No  member  bank  or  any  ofSccr,  director  or  employee 
thereof  shall  hereafter  make  any  loan  or  grant  any  gratuity  to 
any  bank  examiner.  Any  bank  officer,  director  or  employee 
violating  this  provision  sludl  be  deemed  guilty  of  a  nusdemeanor 
and  sliall  be  imprisoned  not  exceeding  one  year  or  fined  not 
more  thru  $5,000,  or  both;  and  may  be  fined  a  further  sum 
equal  to  the  money  so  loaned  or  gratuity  given.  Any  examiner 
accepting  a  loan  or  gratuity  from  any  bank  examined  by  him 
or  from  an  officer,  director  or  employee  thereof  slmll  be  deemed 


,;ifT 


^T    n    micrifi 


m£ioTir\i»     r»  T-» 


,j  ..1...11  i„ 


^T-  =  n^..A    T.nf 


i,  v.-vcecciing 


one  year  or  fined  not  more  than  $5,000,  or  both;  and  may  be 
fined  a  further  sum  equal  to  the  money  so  loaned  or  gratuity 


V 


APPFADIX 


587 


:,ivcn  :  and  slmll  forever  Hicrcafter  he  disqualiflid  from  lioldinf? 
(.tiice  as  a  natioiial-haiik  examiner.      No  nalioiial-baiik  examiner 
.hall  perform  any  •    'ur  service  for  com})ensation  wliile  holding? 
-.lull  office  for  any  l-ank  or  otliei  r,  tlireetor,  or  tiniiluyve  thereof. 
Other    than    tlir    uMial    salary    or   director's    fre   paid    to   any 
oHicer,  director  or  einphiyie  of  a  memlier  hank  and  other  than 
.1   reasonahle  f(  e  paid  by  said  bank  to  sncli  officer,  director  or 
.inployce  for  services  rendered  to  such  bank,  no  officer,  director, 
nnployee  or  attorney  of  a  member  bank  shall  be  a  beneficiary  or 
receive  directly  or  indirectly,  any  fee,  commission,  ■j.-ift  or  otiur 
consideration  for  or  in  coimectioii  with  any  transaction  or  busi- 
ness of  tlie  bank.      No  examiner,  public  or  private,  shall  disclose 
the  names  of  borrowers  or  the  collateral  for  loans  of  a  member 
bank  to  other   than    the  proper   officers   of  such  bank  witliout 
first  having  obtained  the  express  permission  in  writ  in--  from  the 
Comptroller  of  the  Currency,  or  from  the  board  of  directors  of 
such  bank,  except  uhen  ordered  to  do  so  by  a  court  of  compe- 
tent jurisdiction,  or  by  direction  of  the  Congress  of  the  United 
States,  or  of  either  House  thereof,  or  any  committee  of  Congress 
or  of  either  House  duly  authorized.      Any  person  violating  any 
provision  of  this  section  shall  be  punished  by  a  fine  of  not  ex- 
ceeding $.5,000  or  by  Imprisonment  not  exceeding  one  yea--,  or 

both. 

Except  as  provided  in  existing  laws,  this  provision  sliall  not 
take  effect  until  sixty  days  after  the  passage  of  this  Act. 

Sec.  23.  The  stockholders  of  every  national  banking  associa- 
tion shall  be  held  individually  re>p(msii)le  For  all  contracts, 
debts  and  engagements  of  such  association,  each  to  the  amount 
of  his  stock  therein,  at  the  par  value  thereof  in  addition  to  th.- 
amount  invented  in  sucli  stock.  The  stockl>olders  In  any  ^na- 
tional banking  association  who  shall  liave  transferred  tlu  ir 
shares  or  registered  the  transfer  tliereof  within  sixty  days  next 
before  the  date  of  tlie  failure  of  such  association  to  meet  its 
obligations,  or  witli  knowledge  of  such  impending  failure,  shall 

,     Til.     .1.     !.„..*....  ;r  fl,o^- liwl  innrle  no  such  transfer, 

ne  IKluie  lo  ua:  ^:lIl:!-■  v.-wtv:;-.  ;•- 

to  the  extent  that  the  sul)se(iuent  trruisferee  fails  to  meet  such 
liability;  but  this  i.rovlslon  shall  not  be  construed  to  affe.i    in. 


I 


;s8 


AIM'KXDIX 


■^u^y  wav  any  recourse  wlm.I,  >uc-h  .han.l.ol.I.Ts  nu-^Iil  ..llarui. 
i.ave  a^au.st  tl.o.o  in  uhu.e  num..  .ucl.  .hare,  are  reyi.tercd  .t 
tiie  time  of  sucJi  failure. 


an 


T.OAXS   OX    FARM     I.AXDS. 

.^Kr.  21.  Any  national  hanklnn.  association  not  slt^iated  '"n 
antral  n-serve  eity  n.av  n,ake  ioans  MHaired  hv  improved  an. 
>i'Kneun,l.ered  farn.  land,  situat.-d  uithin  its  ^Federal  nserv. 
'I'.^tneU  hut  no  suel,  loan  ^hall  !„■  „,ad.  for  a  lon^a-r  tin,e  tha. 
hve  years  nor  for  an  amount  cxeeedin^r  fifty  ,,.,-  „„tun.  of  tl,,- 
-•tUHl  value  of  the  property  oflVnd  as  seeuntv.  Any  suei, 
;ank  n.ay  n,ake  s.  ■],  loans  in  an  a^^.-e^ate  su.n  ..,ual  In  t^wentv- 
"ve  per  eentnn>  of  it>  capital  and  surplus  or  to  one-tl.ird  of  i^ 
"-ne  deposds  an.I  m,..!,  hanks  ,nay  continue  h.uvafter  as  hereto- 
'"•;;■  t*'  >-<<'^'>ve  tinu.  d.  po>Its  and  to  pay  Inl.rest  on  tl...  same 

11k.   Federal   Ucsc-vc    J{oa,-d    s!,all    have    powc,-    f.-on,    ^in,..   to 
nnetoaddtothe  h\t   -I'  .itics  In  u  Inch  national  hank,  shall  m.t 
'"'    P"n.nttcd    to    n>akc    loan,   secured    upon    real    estate    in    the 
n.anner  dc^crihed  in  this  >eetion. 

FOIUIC.X     Ill!A\THi:S. 

S|.:r   05.    Any  national  hankinn-  a»ociafion  possossmn- a  can- 
;'''';:'V'"r^"'"^^-'"»"''"»<>--  —  v  01..  application.  iU. 

""■,'■"■'■;."""■'■"'    "••"■''•    "' ^"'''    '-"litions    and    nnd,,- 

M.eh  n.n.„latH,ns  as  n.ay  he  p.v.c.lhed  hv  the  saal  hoard,  for 
""'  P'"T'"-  of  securing-  authority  to  csfahlisl,  hranclu.  in  for- 
n-n  conr.fru.s  or  .lep.ndencies  of  the  Fnit,,!  St  ,t.s  for  the 
l.Ttherance  „f  fl,,   forein,,  connnerce  of  the  I-nited  States    and 

to  .xt.  „  re.pnred  to  do  so.  as  fi.cal  a^n  nts  of  the  Fnited  States 
Sneh    application    shall    .pcclfv.    In    adddion    lo    ,|„.    „an,e   and 
•■■■;'"'"'  '"    ""•  I'ankin^.  association  (ilin.   it.  the  pi,,,,  o,-  pl,ce, 
where   the  hanking,   operations    propo..!    are    ,o    I .,r,i,d   on 

;""'»»'-"'>'o"nt  of  capital  >ct  asale  for  the  conduct  of  it.  for,.l.,n 
husinoss.       The   Fed.r.d   !{...,.rve   !»  =  -.,=  =■.{    .]...!!    !,,....     ..  .   .        "^ 

I"-"V"   ..r   fo    reject    s„ch    application    if.    in    lts".iud!^„!.„t!  tl^ 


ArriADix 


)8!) 


amount  of  capital  proposed  to  be  .sot  aside  for  tlie  conduct  of 
loreio-n  business  is  inadeciuate,  or  if  for  other  reasons  the  grant- 
inc  of  such  apphcation  is  deemed  iiiexf)ecHent. 


Kverv    national  l)aiiking  a-MJciation    which  shall   receive  au- 
horitv    to   establish   foreiy;n   hranclus    shall  he  required  at   all 


tiiiio  to  furnish  information  concerning  the;  conditiori  of  such 
hranches  to  the  ('om|)troi!er  of  the  Currency  upon  demand,  and 
the  I'eder.il  Reserve  IJoard  may  order  --pecial  exiuninations  of 
the  said  foreign  branches  at  sucii  time  or  tlmcN  a-  it  may  deem 
h'st.  I'.verv  --uch  national  banking  association  shall  conduct 
the  accounts  of  each  foreign  branch  independently  of  llu'  ac- 
counts of  other  for(  ign  branches  established  by  it  and  of  its 
home  office,  and  shall  at  the  end  of  each  fiscal  period  transfer 
to  its  general  ledger  the  profit  or  loss  accruing  at  each  branch 
as  a  sejiarate  item. 

Sic.   'id      All    provisions   of  law  inconsistent   with   or  super- 
seded by  any  of  the  provisions  of  this  Act  are  to  that  extent   and 
to  that  exteid  oidy  hereby  repealed:  rror'tdid.   Nothing  in   this 
Act   contained  shall  be  construed  to   repeal  \\w  parity  provi-lon 
or   provisions  ccntaln((l  In  an    \et    approved   March   fourt(enlh. 
nineteen  hundred,  (  ntitled  "  An  Acl  to  define  and  (i\  the  -tandard 
of  value,   to   maintain    the   parity   of  all   form>   of  Money   issued 
or  coined  !)y  the  I'nlted  Stal-,  to   refund  il,e  public  debt,  and 
for  other  pur{)OMS."  and  the  Secretary  of  the  TreaMiry  may  f.u- 
the  purpose  of  nialnlalning  such   parity    ..nd  to   siniigthen   the 
gold  reserve,  borrow  gold  on  I  he  security  of  I  'nlteii  States  bonds 
authorized  i)v  seillon  two  of  the  Act  last  referrtd  to  or  for  one- 
\ear  "-old  notes  bearing,-  interest  at  a  rale  of  not  to  e\<'eed  three 
per  ceiiMnn   j/er  aiuunn,  or  sell  Ihe  same  if  necissary  to  obtaui 
<'oIil.      When  til.'  funds  of    h.   Treasurv  on  h  uid  .justify,  he  may 
purdiase  and   retire  such  outst  nullng  bonds   mk!   imfes, 

Si;c.  ;^7.  'I'h.'  provisions  of  th.e  Act  of  M  iv  thlrlutli,  nineteen 
hundred  and  <lglil,  authorizing  national  .  urreiicy  associations, 
the  issue  of  ailditional  national-bank  .inulation,  and  creating  a 
National  Monetary  Commission.  «l>i.h  esplns  liy  limitation 
under  tlie  lenns  of  sneli  Act  on  the  Ihlrtleth  (biv  of  dune,  inne- 
teen   h mdivd   and    f.airtien.   ar(    hereby    txt-nled   to  .luiu-   thir- 


i 


590 


ArriADix 


tictl 


1,  run 


ctccn  lu'iidrcd  aiui  iittccn,  ami  sections 


Ircil  a  I 


1(1  Hftv-tluTi.',   filtv-otu'   llUIH 


Ircd 


and   seven 


fift 


ty-t 


v-or.c  liuii- 


wo. 


<ift- 


one  hundred  and  ninety-one,  anil  fifty-two  hundred  and  fourteen 
of  the  Revised  Statutes  of  tlie  I.'nited  States,  which  nere 
amended  hy  the  Act  of  May  thirtieth,  nineteen  huiuhed  and 
eight,  aicj  hereliy  remaeted  to  read  .  >  such  sections  read  prior 
to  May  tiiirtieth,  iiiii.teen  hundred  ami  ei<;ht.  vui),ject  to  sucli 
amendments  or  modifications  as  are  j)rescrii)ed  in  tliis  Act:  Pro- 
:;'(/( y/,  iKKiCxi't;  That  section  nine  of  the  Act  first  referred  to 
in  this  section  is  hereby  amended  so  a-  to  cliange  the  tax  rates 
fixed  in  said  Act  by  making  the  portion  applicable  thereto  read 
as  follows : 

National  bankinij  a'<socIal!ons  liavin<]^  circulating  notes  se- 
cured (.therwis'  than  by  bon<is  of  the  I'nited  States,  shall  pay 
for  liie  (i)st  three  monflis  a  tax  at  the  rate  of  three  p^r  centum 
per  annum  upon  the  averarro  amount  of  such  of  their  notes  in 
circulation  as  are  based  upon  the  deposit  of  such  securities,  and 
aflerwards  an  additional  tax  rate  of  one-half  of  one  per  centum 
I'er  annum  for  each  month  until  a  tax  of  six  per  centum  pi-r  an- 
num is  reaeli-.d.  an  1  thereafter  such  tax  of  six  per  ceiitum  per 
annum  upon   tiie  a\erage  amount  of  such  notes. 

Skc.  .'2S.  Section  fifty-one  hundred  and  forty-three  of  tli(>  lie- 
\i^((I  Statute^  i>  her(l)e  aimiidid  and  rei  iiaeted  to  r^  id  as  lol- 
lows:  Any  association  f(nii.(  d  uiuKr  this  title  may,  !>  tin  vote 
of  shareholders  ouuin^  fwot birds  f  its  capital  stock,  reduce 
its  (;i,Mtal  to  aiiv  sum  not  below  the  .•iinount  re(piir<'d  by  il-is 
title  to  aiithcn/e  the  f()rmatl<iii  of  associations;  but  no  sucli 
rcmutioii  shall  be  allowable  which  v  ill  reduce  the  cajiit  il  of  the 
a-sociatioii  belou  the  aiiiouiit  riMjuirid  for  it>  oiiKtandm^  circii 
lalioii.  nor  shill  aiiv  reduction  be  made  until  the  aniouii'  of  the 
proposed  reduclion  has  been  n  ported  In  the  Compt  roller  of  the 
Currencv  and  such  reciuction  has  In  i  n  approved  by  the  said 
Comptroller  of  the  Currency  and  by  tht  I'ediral  Reserve  Hoard, 
or  by  till'  ory;anvation  coniinittcc  pending  the  organization  of 
the    I'ederal    liesi'rve    Hoard.  . 

r>£C.  !^'9.    If  anv  (  iause,  s(-ntrncr,  pfiragrapli  or  part   of  tiii- 
Act   shall    for  anv    rea-on   be  adjudMid  by  anv  enurt    of  <i(mi)e- 


APPENDIX 


591 


trnt  iurisdiction  to  be  invalid,  such  judgment  shall  not  affect, 
nnpa'ir  or  invalidate  tlic  remainder  of  this  Act,  but  shall  be  con- 
fined in  its  operation  to  the  clause,  sentence,  paragraph  or  part 
thereof  directly  involved  in  the  controversy  in  which  such  judg- 
inciit  shall  have  been  rendered. 

Skc.  .'JO.  The  right  !o  amend,  alter  or  repeal  thi^  Act  Is 
liereby  expressly  reserved. 

Approved,  December  23,  1913. 


INDEX 


Acceptability,  a  rcqni.>ilo  of  inonc.v.  11. 
Act, 

Aldrioh-Vrocland.  '$7.).  473. 

BIan<l-AlliM)n,  187S.  iOi. 

Free  Banking.  i>f  1S.")I).  U.V 

General  Baiikiiij;,  110. 

Lcfjai  tender,  (iO. 

N.itional    Bank   (see    Natinnal    Bank 
Act).  :<(!.">. 

Of  IHOH  (Canada;.  \7i. 

Of  liXIO,  V<i. 

Of  ISH  (Hn^ilandV  308. 

Slicrinaii.  Hii. 
.\pcncics.  <rcdit,  331). 
.V^'ricultural  creilit,  cheaper,  tOS. 
Apriciillural  [>roducts  as  money,  38. 
Aldricii-Vrccland  Ail.  i.">f). 
Arl.ilrat;.-.  l.-,l    \:,i. 
Army  BilU,  171   I7.V 
.\sset  ciirren<y,  U!> 
.\sset'i,  ciincealcd,  i(\\ 
Audit,  -.harelididiT.'.   i:!I.  t3fi. 

B 

Bank  (or  Banks), 

Articlps  of  .\.ssoeial  mn  df  lir^t   char- 
tered. 177. 
Audits.  131. 
Capital,  4.-.I. 
Capital  anrl  credit.  2*3. 
Capital  stiM  k  of,  '271. 
Cashier.  •<!».t 

Conlral  nold  reserves,  liO. 
Claxsifi.'d.  ^SO  iHi. 
Cleariti^j  houses.   ISO. 
C.  tfliitii'T'  ifii,  T/iiV. 


Credit,  department  of,  ,337-316. 

Difficulties  of  establishing,  .306. 

l)ire<-t<)rs  of,  i87-i93. 

Discount  clerk,  i96. 

Early,  348-3t!). 

Early  Canadian,  4H. 

Earning  power  of,  i')3. 

Economic  functions  of,  iSl-iH. 

Employes  (.f,  i94-i97. 

Evolution  of,  280. 

Failures  in  Canada,  433. 

Financial,  3HH,  427. 

First  in  I'pper  Cfln-da,  178, 

First  I'nited  State>,  3.">0, 

Foreign  Di'partment  of,  1  i3. 

Free  Banking  Act  of  18.>0,  41, V 

Functions  m  making  jtayment,   113 

lU. 
(ioverninent,  the,  482 -.")i')2. 
Incorporation  of,  410. 
Inspe(  tion.  Internal,  431. 
Liability  of,  in  <<>llecting,  2!)0. 
Liai)ilily  of  stockholders,  272. 
Loans  (see  Loans). 
Loans  to  directors,  40,5. 
Mergers  and  amalgatnalions,  4,56. 
Note  feller.  2!».i. 
Number  of,  to  population,  4t2. 
Officers  of.  2!>3-2!)t. 
Of  small  capital,  470. 
Operation  of.  241. 
Organi7.atini\  of.  280 
Organi^.alion  nf  n  ('.uMdian,  43L 
Origin  of  great  chartered,  176. 
Paying  teller,  294. 
I'rivrtte.  280. 
I'rofits  of  ('anaiiiaii,  t.53. 
Provisions  of  the  early  bank  charter! 

410. 


592 


INDEX 


!):j 


}7-3t6. 
?,  306. 


31-247. 


113- 


178. 

n:!. 
■)0,  n,v 
yment, 

H. 


,  i7i. 


ions,  456. 
n.  Hi. 


lifin,  431. 
1,  17G. 


ank  chartors. 


Hank  (or  Bark!f)  —  (rnnlinue(1) 

Reserves  composed  of  (our  elements, 

4i6. 
Reserves  fixed  liv  each  bank,  424. 
Savings  (see  Savings  Banks). 
Second  I'nited  States,  353. 
Settlement  of  accounts  between,  116. 
Shareholders'  audit,  431,  436. 
State  ownership  of,  409. 
Stockholders  of,  286. 
Surplus,  449. 
Taxing  the.  486. 
Trust  companies,  467. 
Underwriting  and  promotion  of  cor- 
porations, 463. 
V.  S.  Treasury  in  relation  to,  390-394. 
Wall  Street's  relation  to.  381-389. 
Rank  .^ct  of  1844,  308. 
Bank  circulation,  expansion  of,  376. 
Bank  Credit, 

.Advantages  of,  251-253. 
Deposit.  203-208. 
Bankers, 

Privileges  of,  239-241. 
Requisite  qualities,  315. 
Responsibility  of,  245  2 17. 
Banking, 

Branch  I)ank  system,  417. 
Branch  banks  and  the  local  commu- 
nity, 439. 
Call  loans,  427. 
rommercial,     195     (see    Commercial 

banking). 
Commercial  letters  of  creclit  in  C.in- 

ada,  477. 
Concentration  of  reserves  in  liramh 

banks.  Ul. 
Conilitiiins  of  note  issue.  41*^. 
Karly  characteristics,  317. 
KtTccI  of  union  of  I'pper  and  I.mver 

Canada,  414. 
Knclisli  customs.  139. 
I'inancing  the  crops,  473. 
I'r.tnce,  401-402. 
Historical  peri(Mls,  318. 

10. 


Interest  chari.'es  in  the  West,  468. 
Inti  rnal  bank  inspection,  431. 
Money  trust  of  Canadian  banks,  456. 
New  features  added   to,    1820-1830, 

113. 
Origin  in  Canada,  409. 
Security  of  note  issues,  423. 
Shareholders'  audit,  431,  436. 
State,  .35(i. 

Substructure    of    Canadian    banking 
system,  410. 
Banking  Systems, 
European,  395—408. 
National,  365-370. 
State  experiments  with,  362-364. 
Bank  mergers  and  amalgamations,  456. 
Bank-note  Issms, 
Benefits  of,  448. 
Criticism  of,  446. 
Profits  on.  447. 
Bank  of  Kngland, 
.\ct  of  1S44,  398. 
Character  of  note,  390. 
Control  over  gold  supply,  129. 
History.  395-399. 
Management  of,  400. 
Origin,  395. 

Relation  to  Government.  397. 
Bank  of  France,  130 
Branches  of,  Kll  406. 
(  iirrciicy  of.  40,1. 
System  of.  lOt- Kl6. 
Bank  of  Cicrniai  .-, 

fiovcrnment  relation  to,  106. 
Svslem  of,  107. 


.ifTcctcd    1 


>y. 


Bank    notes,    prici 

215. 
Bank  reserve.  207. 
Bank  reserves,  78. 

Dominion  notes  as,  189. 
Bank  Sfatiinent, 

( 'ombint  il.  260. 

Double  entry  system  in,  262-405. 

Liabilities  in,  271-279. 

Resourci'S  in,  2(!0-  270. 

s.;....,!...j  ?!:?-..•!  •:•.    J?.''.   '?7.' 

Iniled  States  bonds  in,  206, 


,-.ni 


INDEX 


!?,ink  System, 

l$(m.l  Deposit,  359. 
Free,  :i(ll-.S(U. 
New  York.  ;!,)!). 
Safely  fliuil,  3.")!). 
SiilTolk,  357-358. 
Barter, 

Excliange  by,  li. 
Influenro  im  industry,  12. 
Reaver  skins  as  money,  37. 
Bimetallism,  153-l(>5. 
A<lvantag<'s  of.  15S. 
Bland-Allison  Act  of  187«,  16£. 
Defined,   l.K). 
Diftieulties  of,  157. 
Final  failure  of.  164-165. 
Latin  I'nion,  160. 
Sherman  Act,  1H90,  162. 
Single  standard,  158-160. 
Bliind-Allison  Act  of  1878,  162. 
Bonds. 

Defined,  1!)6. 
Interest  rate.s  on,  108. 
TimhiT,  198. 
Boris,  KiO. 

Borrowing;,  long  time,  199. 
Branch  Banks, 

.Vdvantages  of,  4V0. 
Concentration  of  reserves  in.  441 
Functions  in  local  community,  439. 
Functions  of,  418. 
In  foreign  countries,  458. 
OKjections  to,  439. 
l?ranch  l)ank  system,  417. 
Mn^rgs  vs.  Spalding,  290. 
Bu-iness, 

Beginning  of,  5. 

I'rar-tice  of.  1. 

Result  of  division  of  labor,  5. 

Tecluiology  of.    V. 

(' 

Cables.  Foreign  Exchange,  136. 
(  ;dl  Loan  Rat.-s,  3HV. 
'"idl  Loans.  3^(1.  l<7. 

In  <  ana.l.i.  tCl, 

In  New  York,  100. 


Canada, 

Bank  failures  in,  4.33. 

Deposit  currency  in,  443. 

Economic    situation    after    conquest, 

16G. 
Financial    situation    after    conquest. 

167. 
Foreign  coins  in,  lHl-182. 
New  England  trailers  in,  166. 
Canadian  Bankers'  .\ssociation,  438. 
Canadian  b.inknig  problims,  439-  »S1 
Canadian  Banking  System.  409-438. 

Substru(  ture  of,  410. 
Canadian   bank   notes,   based  on  com- 
mercial assets,  419. 
Canadian  clearing-houses.  480. 
Canadian  monetary  system,  history  of, 

100-192. 
Capital, 

Bank,  243  (see  Bank). 
Bank  a  distributor  of.  236. 
Defined.  -^0. 

Economic  importance  of,  20. 
Movements  of,  133. 
Need  of  banking,  45L 
Ri'lation  to  currency,  22. 
Temporary  providing  of,  327. 
Value  proporti(mate  to  income,  20. 
Working    (of    dealers    in    securities), 
.382. 
Capital  g(HKls.  demand  for,  23. 
Capitalization  define.i.  21. 
Cash,  value  of.  254-250. 
Central  gold  reserves,  420. 
Certification,  Wall  Street,  .383. 
Che(  ks.  title  to  deposited,  308. 
Circulation,  rapidity  of,  73. 
Civil  War, 

Financing,  226-227. 
Prices.  10 1. 
Clearing  houses,  Canadi.in.  480. 
Clearing  liousr  jjrinciplc.  12! 
Cleveland.  President,  ii,  panic  of  1893, 

178-182. 
CoKuizability.  a  requisite  of  money,  42. 
Couiage, 
Earliest.  40. 


INDEX 


505 


Coinage — (continued) 

History  in  United  Slates.  of.-O;?. 
Kcquircmont.s  of  frooil.   V7. 
Coins, 

Fraudulent  depreciation  of,  17-48. 
Oriuin  of  names,  Ki. 
(  i.llateral,  rrstrielions  on,  384. 
Collateral  loans. 
Details  of,  .'?8:?, 
For  Banks.  .^iO. 
Merehandise,  ;5i9-;i36. 
Risk  in,  ;5i4. 
(  ()lle<'tions, 

Knglish  method  of,  301-302. 
Laws  of,  i07. 
Out  of  town.  300. 
Commerce,  foreign,  131, 
(  (innnercial  Ranking,  function  of,  19.5. 
Commercial  Banks,  plan  for,  387. 
Commercial  letters  of  credit  in  Canada, 

477. 
Commercial  paper. 
Dealer  in.  3V3-344. 
Demand  and  supply  of,  342. 
Double-name,  3il. 
Houses.  iOl. 
I  Single-name,  3il. 

Size  of  notes,  34.5. 
I        <  ninmodity,  acceptahility  for  exchange, 
41. 
Concealed  assets,  iM. 
Contracts,  [laymrnt  of,  7.5. 
(  nnvertihilily,    inllueuce    on    value    of 

moniy  and  credit.  1<>. 
(  ci-operative  iredit  soci<Mies,  .'lOO. 
(  n-t    of   production,    determination   of 

value,  31. 
Cr-dit, 

Analysis  of,  il8. 

Bank,  ^Oi-im  (see  B.-ink  Credit). 

Bank  a  dealer  in.  <33. 

Cancellation  of,  i\i. 

Cheaper  agricultural.  tttS. 

Convertibility    the   essence   of    value 

of.  U!. 
('.._. ..,.._.,.;vp  j-redit  siK-ieties.  500. 

I   rcaticu  l.v  Imnk,  it!)-i.51. 


Dangers  in  panics,  308. 
Defined,  15,  193. 
Deposit.  i03-i00. 
Kxcliangc  by,  14. 
Gold  the  basis  of,  206. 
Importance  of,  209. 
Indirect  barter.  1<>. 
Kinds  of.  19.3. 
Letters  of.  14.5-146. 
Liquidation  of.  200. 
Necessity  of.  426. 
Non-circulating,  211. 
Operation  of.  16. 
Prices  afTected  by.  i  1 1-219. 
Settlement  of  balances  by  use  of.  122. 
Sources  of  information,  337-3.39. 
Speculation  and.  216-217. 
I'se  in  industry.  194. 
I'scfulncss  in  I'xchange,  14. 
Credit  .\gencies,  339. 
Cre<lit  money, 

.Vrgument  for.  224. 

Cla.ssified.  220. 

Defined.  221. 

Devices  to  maintain  value  of.  224. 

Difficulty  of  adjusting  supply  of,  22.5. 

Factors  determining  value,  221. 

Prejudices  against  before  1861,  226. 

Prices  affected  by.  21.5. 

Regulation  of.  iii-iii. 

Risk  in  free  use  of,  222. 
Crisis  of  18.57,  18.5. 

Crop,  moving  the  western  wheat.  17*. 
Crops,  financing  the,  17:!. 
Current  y, 

,\fter    union    of    I  pper    and    Lower 
Canada,  18:i. 

.\ttempfs  at  reform  of  Canadi.in.  178. 

Based  on  commerci.ci  assets.  tl!> 

British    Government    and    Canaiiian. 
178. 

Canadian  in  second  quarter  of  19th 
century,  ISi. 

Cause  of  de])reciate<l,  18. 

Changes  after  178.3.  170. 

( 'iimplroller  of.  367. 

Decimal  .'vstera  in  Canada.  186. 


)9n 


INDEX 


CurrrtiCN — (rnntinunl) 

Dff.'cts  of  rnitcil  States  217-^19. 

Ucpiisit,  -ili  {>i-i-  Doi)()sit  Curri'iicy). 

Deposit  rurrtiicy  in  Canada,  H3. 

Fractional.  I(i9. 

Halifax,  His. 

Mc(lia  of  i'\<liaii>,'o.  15. 

Hi'lalion  to  raiiila!,  ii. 

Rosnlts  of  roform.  170. 

Soa  onal  (icmaiuN  for,  .'i73. 

Shipments  of.  1 17. 

Standard,  of  Colony.  100. 

Iniforni.  in  Canada,  \'.H. 

York,  KiS. 
Cut  eoins  as  fractional  rurr-  iicy,  160. 


Debt, 

Demand.  iiO. 

Government.  ii7-iiO. 

Provisions  for  reliriiif,',  230. 
Deferre<l  Payments, 

Defme<l.  G.j. 

Ciold  as  standard  of,  04. 
Demand,  delinc-d.  71. 
Demand  for  money. 

Discrimination  in.  70. 

Factors  infhiencm};.  7:5-77. 

International  trade,  SO. 

Seascmal.  SO. 

Tncertainty  of,  SI. 
D.-mand  sterling.  l:iS-l;?9. 
Deposit,  natiin-  of,  i'lG. 
Deposit  Curn'n<y, 

Cost  of,   U.V 

Development  of,  371. 

In  Canada.  11.3. 

Inelasticity  of.  37,5. 

Limitation,  .37i. 

Ohjeclions  to,  U5. 
Depositors, 

Inducements  of  hank  to.  .301  3()t). 

Protection  of,  30!»   312. 
Deposits, 

Cost   in  (iovcrmncnl  savin^js  hanks 
40(i. 

C.eneral,  30.3. 
e_\|l— 3S 


Government.  250. 

Guaranteeof,  .37S-3S0. 

Interest  on,  471. 

Special,  :>03. 
I)e|)reciation  of  currency,  IS. 
Desire,  defined,  71. 
Directors,  loans  to  hank,  105. 
Discounts.  201. 

Divisihilily.  .-i  re(|ui-iti'  of  money,  41. 
I)i\isi.in  of  Lal)or, 

business  the  rcs\ill  of,  .">, 

FfTect  on  demand  for  money,  7t. 
Dollar,  defined,  20. 
Domestic  Exchanp\  112-122. 
Dominion  Notes, 

.\s  hank  reserves,  ISO. 

Legislation  coneerninR,  100. 


E 


Economic  Fore<"s, 

(-umulalive  effect  of,  03. 
Prices  governed  hy.  107-109. 
Value  a  register  of,  27. 
Economic  goods,  kinds  of,  IS, 
Economic    situation    in    Canada    afte 

Con(|Uesl.  KiO. 
Economics,  <ietinition  of,  4. 
F^ngland. 

Adoplion  of  gold  standard.  53. 
Bank  of  (s.c  llauk  of  Fngl.uidK 
Experienie  with  douhle  standard  c 
value,  52-53. 
English  TreaMiry  Hills,  174. 
Entrepreneur, 

Kffect  on  <-redil,  101. 
System  of  production.  10. 
E\iropean  Hanking  Systems,  305-408. 
Evchaeige, 

,\rmy  hills  a  medium  of,  174-175, 

Barter  stale  of,  12. 

Heirinning  of.  1 1. 

Hy  iTcdil,  11. 

Hy  money,  12. 

Dom.'stie,  112-122. 

i  i.ii  i  \    «  ,iu«uliciti   ii.i  1  c" :;;;:;:  -  :;::::,    :  ■ 

Karly  r\prriin«"nt-i  in  luMni  of.  ir>H 


INDEX 


o97 


8. 

iiiiiicv,  41. 

inry,  7t. 
ii. 

!)0. 


lOD. 

IS, 
"aiiaila    aftiT 


ni.  .-.3. 
.standard  of 


ii>,  3!).)-in8. 
r,  17;-17J. 


_    .  1        l-^O 

i.dia  (.f,   UiH 


K\(lianj,'«- — ironl!  lined) 
I'.aily  iiifdiiiiiis  of,  11. 
l''iirrit.Mi.    I'ii-lji    IM'''    Foreign    Kx- 

(■li.int:r,). 
(itrmaii  and  I'nncli,  119-151. 
(iovcrnminl  dilji-nturc.-,  as  a  mtxlium 

uf,  IHl. 
M,ll.od>  of.  11. 
Money  a  fm  tor  in,  1.'?. 
New  York,  lUllJ. 
Value  of.  7. 

Uiili  Cnited  Kingdom,  ISO. 
lAehanp'aliility,   utility   of   money   de- 
pendent on,  i\i. 
Exchan^'e  utility,  tij. 


Falkner  price  tahl.s  lOO-lO-l. 
Feudal  I'eriod,  metals  in,  lJ-1. 
Fiat  money,  defined,  iiO. 
Finance  I'ill-i, 
Dclineil,  110. 
I'njlit  on,  U1-U.3. 
I'iuan'ial  hanks,  plan  for,  .'5S8. 
I'liiancial  situation  after  Conque-jl.  1G7. 
riuancinj;  the  crops,  47:5. 
Fnreiun  hranch  l)anks,  IJS. 
Foreign  coins  in  ("anada,  lSl-182. 
Foreign  commerce,  131-13i. 
Foreign  Kxchangc, 
Dealer  in.  Hi. 
I',nuli-li  Treasury  l)ill>,  174. 
(iold  point,  U7-US. 
Investment  hnying  of,  147. 
Market  articles,  Ki.V  13G. 
(^uotalions,  li:>. 
.■^peciil.ilion  in,  l;i7. 
Varieties.  l:iS. 
Fractional  currency,  U>1>. 
Hons  as,  109. 
Cut  coins  as,  ICi). 
France. 

Hanking  in,  401. 

Iliuk  of,  40^  (see  Hank  of  France). 
l  fee  hanks,  41.">. 


Free  Silver  Party,  30. 


Gait,  \.  T.,  18G. 
(ialt's  plan,  ISO. 
fiarni>hment,  3;io. 
Cicneral  Hanking  .\ct. 
Basis  uf,  410. 
Points  of  difference  from  early  thiii- 

ters,  Mi. 
Provisions  of,  410. 

Similarity  to  cliarlers  of  three  original 
hanks,  410. 
Germany,  Imperial  Hank  of,  400-408. 
Gold, 

Credit     an      inlluence     on     use     of, 

li)i). 
Defects  as  .standard  of  deferred  pay- 
ment, 04. 
Demand  for,  ~.'>. 
Good  (lualities  a-  money,  44. 
Market  for,  IM. 
New,  S7-SS. 

Objections  to  u>e  as  money,  15. 
Premium  on,  81. 
Price-raising  effect  of,  87. 
Shipments,  131. 
Standard  of  value,  29. 
Supply  of,  83-85,  80. 
^Vorlil's  stock  of,  \o3. 
Gold  certiticates,  iiO. 
Gold  (joint, 

Maximuni,  li7. 
Minimum,  H7. 
Gold  standard,  I'ni!    1  States  adoption 

of,  01. 
Government  credit  money   (st-e  Credit 

Money  1 
Government  <lehentures  of  1848,  184. 
Government  dehl,  idi'-WO. 
Government  note  issues,  48i. 
Government  postal  hanks,  4!t,'>. 
Government  savings  hanks,  4"Jj. 
Goods, 

Consumption,  18. 
Prcxluction,  18. 
Cireenijacks,  iiii. 
Greshum's  Law,  ,10  r>l. 


598 


INDEX 


p 

I 
If 


n 

Hiilifax  currency,  1(!S,  170,  ISG. 
ILimilloii,  Ali'\;ui(i<'r,  '>C>,  J7,  JH,  17G. 
HiiK'ks,  Sir  FrancLs,  IS'J. 

KcMilt  of  legislation,  191. 
Hoarding', 

Decline  of,  77. 

Go\erniuent,  7S. 


I 

Imperial  Bank  (.M-e  Hank  of  Germany). 
Income,  sjiveil,  it. 
Income.s, 
Money,  iii. 
Sources  of,  i'i. 
Indu.strial    .system,   relation    of    money 

and  banking,'  to,  10. 
Industries,  j)roductive,  i'M. 
Industry, 

Credit  influences  on,  i\9. 
Integration,  10. 
Inelasticity,  present  currency,  375. 
Inflation,  early  attempts,  100. 
Inspection,  Internal  bank,  4;il. 
Interest  charfjcs  in  the  West,  108. 
Interest  on  deposits,  471. 
Investing,  100. 
Investment, 
Detinetl,  H. 
Methods  of,  i-l. 
Real,  ^5. 


Jackson,  bank  opposed  by,  3j5. 
Johnson,  J.  v.,  -US. 


Kiting.  307. 


Labor, 

Division  of,  ,■;,  i). 

Ideal  lin  i^ion  of,  5, 
La'iii  I'nion,  UiO. 


Legal  tender,  .Vi-.'jt). 

Hasis    of    legal    tender    issues   iu    the 

Diimini'ii,    Sio. 
InCanad  .     .)-2. 
Legal-tender  .\cts,  of  180^-1803,  00. 
Legal-lender  Laws, 

Constitutionality  of,  (JO. 

EfTect  of,  (i(i. 
Legislators,  mistakes  of  early,  51. 
Letters  of  Crciia,  travelers,  145-146. 
Loan  clerk,  responsibilities  of,  385. 
Loans, 

Call,  'M6. 

Capital,  318. 

Cash,  ^54. 

Classified,  315-320. 

Collateral,  324  (see  Collateral  Loans). 

Credit,  254. 

Demand,  321. 

In  bank  sla'.  nient,  264. 

Industrial,  31U  318. 

Investment,  315. 

Mortgage,  319. 

To  directors,  405. 

To  farmers,  429. 
London  settlement,  136. 

M 

Margin,  defined,  33. 

Marginal  utility,  .32,  33. 

Market,  gold,  129. 

Medium  of  Exchange,  requirements  of, 

40-43. 
Merchandi.se,  collat<ral  for  loans,  329- 

33(). 
Metal,  standard  of  value,  48-49. 
Meluls,  as  money,  44. 
Mintage,  54. 
Monc.\ , 

.\nioi:nt  necessary,  90. 
.\^  agent  of  production,  9. 
Convertibility    the   essence   of   value 

of,  10. 
Credit,  72. 

Dcniunci    lor,    73    (see    Demand    for 
Money). 


.V 


INDEX 


50!) 


\I  inrj — (continued) 

liat,  7i. 

I  uriuM  i)f,  1 1- 

linliri'(t  barter,  i;i. 

In^lrumi-ut  in  production  of  wealth, 
10. 

Metals  as,  44. 

I'Litiuum  used  as,  45. 

rriinitive  forms  of,  30-40. 

l{iu.sons  for  the  study  of,  1. 

Represents  incomplete  exchange,  13. 

Heiiui.^ites   of   commodities   used   as, 
40-43. 

Short  sales  of,  95. 

Standard,  li. 

>>:ppl.V  of.  Si,  85. 

1  nited  Slates  varieties  of,  82. 

I'tilily  of,  13,71. 

\'arielies  of,  7i-73. 
Muuey  and  Banking,  relation  to  indus- 
trial system,  10. 
Moiu-y  and  ("redit, 

I'uiilitate  exchange,  17. 

Rrpresentatives  of  wealth,  IC. 
Muncy  trust,  Canadian  banks  in,  450. 
Mortgages,  196. 

N 

N.i.h,  W.  .\.,  quoted,  331. 
Nilional  Bank  Act,  305. 

I'.arly  history  of,  300. 

Sununary  of,  307-309. 
\  ilional  bank  notes,  il3. 
National  banking  system. 

Lack  uf  unity  in,  377. 

I'resent  condition--  of,  371-380. 
N  itional  Banks, 

I  lasses  necessary,  4i7. 

Dclined,  iSO. 

Technical  powers  of,  308. 
\-,\  York  Exchange,  1  U,  118. 
\   w  York  Sttxk  Exchange,  383. 
\ole, 

(  ullateral,  ^^i'^. 

•ludgnicnt,  3i3. 
\..!,-  broker,  341. 


Note  Issues, 

Conditions  of,  419. 

Dominion,  189. 

Government,  180,  iSi. 

Provincial,  187-189. 

Reserve  for  (iuvernment,  48i. 

Security  of,  ii'-i- 
Notes,  circulating,  3()9-370. 

o 

Organization  of  a  Canadian  bank,  431. 

Overcapitalization,  ■i'i. 

Overdrafts,  H\3. 

Over-rating  of  coins,  170-171. 


Panic, 

Rich  man's,  380. 

Warnings  of  1907,  3. 
Paper  standard,  00-01. 
Placer  mining,  100. 
Platinum  as  money,  45. 
Political  Economy,  defined,  3. 
Population,  effect  on  demand  for  money, 

73. 
Postal  savings  banks,  378,  490. 
Pound  sterling,  Ho- 
Premium,  gold,  81. 
Price, 

Changes,  91-94. 

Detined,  09. 
Prices, 

Civil  War,  104. 

Credit  an  influence  on,  211-219. 

Uepentici't   upon  money  market,  70. 

Economic  forces  governing,   107-109. 

Reserves  in  rci    '  ion  to,  3S(i. 

Speculation  an  influence  on,  210-217. 

Theory  of,  95-111. 
Price  tables,  97-107. 

Comparison,  105. 

Falkner,  100. 

Foreign,  100. 

Weigiiting  of,  a9. 
Private  banks,  280 


V 


(inn 


INDEX 


I'licidiiu.  coiiwiuc  uttrihutciJ  In,  Hi. 

I'dslal  liaiiks  V.)J. 

I'mducliiiii, 

Hy  iliaiif,'!'  of  o\vnersliip,  C. 

{'o-()|)irativc  sy>t(M!i,  IS). 

D.fiiud,  -,. 

Miitrcpn-ucur  sy^li'iu,  19. 
I'nxliiilivi'  industries,  i.'il. 
IV.ifit,  .Iffiiied,  i7. 
Profits  of  C.iiuidian  banks,  453. 
FroptTty, 

D.'fined,  8. 

Iiisi'curity  of,  7C. 
PvramidiiiL',  380. 


R 


Ratio,  silver  to  >,'old,  ."lO  (iO. 

Receipts,     \vareliuiJ.ie     (see    Warehouse 

Reeeiplsj. 
Reiilishank,    4(>'j    (see    P  luk    of    (ier- 

inaiiy). 
He.-e.ve. 

.Aiiioiint  ner     sary,  t-V. 

Rank,  -207. 

Melh.:)ils  itf  inereasiiij,',  iiJ7. 

National  liank,  ;!7(). 

Secondary,  i5S. 

I  nrelialjility  of  bonds  as,  xa9. 
Reserves, 

Call  loans,  Vi7. 

Central  avM,  4-20. 

Coneentralinii  in  branch  hanks,  4H. 

Depletion  of,  ;!T4. 

Fixed  by  each  bank,  4ii4. 

Four  elements  of,  l-2(i. 

Gold,    for   (lovernnient    note    i»ues, 
4S-^. 

Investment  securities,  4:^8. 

Loans  to  manufacturers,  wholesalers, 
and  farmers.  4i28. 

I'rids  in  relation  to,  386. 

RedeposilinK.  380-387. 
Resourct  s,  alterations  in  value  of,  iGS. 
Ridirely,  opinion  of  (  oiuptroiler,  i'.H. 
Rourke,  J.   !■:  ,    too. 


s 

.Safety  deposit  vaults,  304. 
Saving,  IOi>. 
Suvinjis  bank,  iH3. 
Savings  Ijanks,  49j. 

Postal,  378. 

Present  conditiotis  of,  ;'>77. 
Secretary  of  Treasury, 

K\ped!cn,s  of,  393. 

Re>p., liability  of,  390. 

Requir'/mcnts  of,  'Mi. 
Securities, 

Dealers  in,  3Si, 

Market  in  Cnited  States,  381. 

Indigested,  Ma. 
Selling, 

Forced,  9fi. 
Set-otf,  31^.  313. 
SettleuKnt,  London,  130. 
Shareiiohlcrs'  audit.  431,  43C. 
Shern\an  .\ct  of  !Si)(),  'Oi. 
Shipment  ~.  f,-o]d,  131. 
Silver, 

Bland-.\!!ison  .\,  (  of  1S78,  \(ri. 

Rriiisii  iiiiiia  and  c  oinage  of,  103. 

Uemonetization     by    Iniled    States, 
161. 

E(Te(  t  of  .\ineriean,  1.^5. 

(iiiod  (pialitii  s  as  money,  44. 

Latin  I  iiioi:,  100. 

Objeitions  to.  4.5. 

Sherman  .\(l,  1890,  IGi. 
Silver  [,'art\ ,  1(0. 
Short  sale,,  '.>.;. 
Shorts,  si|Uci./ing,  9.». 
Shortt.  Dr.  Adam.  410. 
Single  stand.inl,  l.iS    iOO. 
Spcculalioii,  credit  an  influenee  on,  i\i'' 
Slaliilil\.  |-e(|U!site  of  money,  4i. 
Standard  of  value, 

.\l)preciating.  08. 

Double,  49,  .5^-53. 

Gold  in  Lnited  States,  6L 

Melailic  money  as.  48. 

Paper.  00-01. 
State  Hanks,  d<'iiu( d,  -^80. 


V 


iM)i:x 


tiOl 


Stiitrmont.    R;ink,   '2(;0-iJ70   (sec    Ikii'k 

J^'Htomcnt). 
Stiitciiu'iiK  III  till'  Ciovrriiiiii'iil,  H'l' 
State  (i\vtirr~lii|)  of  liaiik--.   10I>. 
StiH-k  K.\(  Ikiiij,'!-,  New  York,  .'583. 
St<K-ks,  i;!:!. 
Siih-Treasiirifs,     srlllnnriit     i>r    l),niks 

throiigli.  1  IT. 
SiiiTdlk  Hank  S.v.strni.  ;i.i7-:i.>S. 
Supply,  money,  Hi,  s:>. 
Surplus,  bank,  27;i-27.'5. 
>iirplM>  or  rest  fiitu!-.  oxcrssivo,  -M9. 

T 

Taxing  li.-ink-.  ISCi. 

Taxipf;  circiilaliori,   iSH. 

Toliacfo  as  mmicy,  iiH. 

Td'irists,    ('(Tfil     1111    fdi-ci^ii    lAilMiip', 

l:U. 
Trailc,  infliu'iii-c  <if  motu'y  on.  i:> 
Treasury.  Secrel.iry  ft  (»•>•  Scenl.i  ry  nf 
TreaMiry)   I'liitci  ^lalrs  (><■.■  [  .  S. 
Treasury). 
Tr:i~t,  Canadian  l)anks  in  lanuey,  i'Ai. 
Trust  Companies, 

\n(l  hank.s  407. 

Defineil,  iHi. 

D.'po  its  of,  iS.'i. 

Trust  De])artuionl  of,  iJ83. 
Trulls, 

<  Orporate.  iSl. 

!iidivi(iual,  284. 

u 

rmlerwrii  mu,  281. 

.Vnd  promoliou  of  corpnvalions,  40.1. 
I'tiiformity,  .'i  requisile  of  money,  11. 
I'nited  States, 

I'irsI  Hank  of,  r!.50-:!.-)2. 

Ilisiory  of  eoinajje,  .)(i-(iI5. 

Second  !lank  of,  ,'{,53. 
Tnited   Stales   ')on<I--,    in    Hank   State- 
ment. 26C. 
I  nited  States  money,  varieties  of.  Si. 
1  lilted  Slates  Steel  Corporation,  !). 
I  iiiied  States  T'reastli  s  . 

Hank    in  relation  to,  :!!K)-.')1)1. 


Strin^e'icy  eail.sed  hy,  .'591. 
I'siiry  laws.  'M3. 
nility. 

KxehanK'',  .'J.J. 

Kxtra  exchange,  12. 

Marginal,  .H.  ;t;i. 

T'lieorv  of  value,  31. 


Value. 

.\ttendeil  li\  r!i,iiit;e^  in  price  of  gold, 

:!0. 
( 'o~l  of  proihiilion  theory,  .'il. 
Define.l,  r,\ 
Dcleriuinalion  of,  :!I. 
(iold  ni>t  an  ideal  standard  of,  -2!). 
IViee  distingnislie(l  from,  is. 
I'riiiiilive  ideas  of.  :>S 
Sta!)ilit\     of,    ■     requisite    of    money, 

1.'   t.i. 
Store  of,  7.'). 

rtllily  theory  of.  .11. 
Voliuf;  power  of  shareholders,  412. 

W 

\\  aiiipnm. 

Dl'fects..       i~2. 

I  se  as  niipiie.v.  .'ifl. 
Wall  Street,  banks  in  n  lation  to,  .S81- 

;!S!». 
Warehouse  receipts, 

Law  of,  ;i.'i'>. 

Loans  on,  3.'5;j. 

Penalty  for  illeu'.'il  u^i'.  :!:!."). 

IVoteelioli   lo  holders  of,  AM. 

."-afefXiLirdini;  of,  :i:!l. 
Wealth. 

Hanking'  .:n  iu-litution  in  prodnrtinn 
of.  10. 

Classid.'d,  18. 

Definition  of.  1.  8. 

Money  an  instrument  in  production 
of.  !(». 
Wevhurn  Seeiirilv  H.ank.   '70. 


York  cTirrenrv,  1(!8.  171. 


